PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON * * * * * * * * * Hope Gas, Inc., dba Dominion * 08-1761-G-PC Hope, Dominion Resources, * Inc. and Peoples Hope Gas * Companies, LLC * * Hope Gas, Inc., dba Dominion * 08-1783-G-42T Hope * * * * * * * * * * HEARING TRANSCRIPT * * * * * * * * * BEFORE: MICHAEL ALBERT, Chairman JON MCKINNEY, Commissioner ED STAATS, Commissioner HEARING: Thursday, August 20, 2009 8:30 a.m. LOCATION: PSC Howard M. Cunningham Hearing Room 201 Brooks Street Charleston WV Reporter: Alison Salyards Any reproduction of this transcript is prohibited without authorization by the certifying agency.
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1 A P P E A R A N C E S 2 3 WENDY BRASWELL, ESQUIRE 4 Public Service Commission of West Virginia 5 201 Brooks Street 6 Charleston, WV 25323 7 Counsel for the Public Service Commission 8 9 DAVID A. SADE, ESQUIRE 10 Consumer Advocate Division 11 7th Floor, Union Building 12 723 Kanawha Boulevard, East 13 Charleston, WV 25301 14 Counsel for the Consumer Advocate Division 15 16 LEE F. FEINBERG, ESQUIRE 17 Spilman, Thomas & Battle, PLLC 18 Spilman Center 19 300 Kanawha Boulevard, East 20 Charleston, WV 25301 21 Counsel for Peoples Hope Gas Companies, LLC 22 23 24 25
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1 A P P E A R A N C E S (cont) 2 3 GEORGE A. PATTERSON, III, ESQUIRE 4 Bowles, Rice, McDavid, Graff & Love 5 P.O. Box 1386 6 Charleston, WV 25325 7 Counsel For Independent Oil & Gas Association Of 8 West Virginia 9 10 JACQUELINE A. HALLINAN, ESQUIRE 11 Hallinan Law Offices, PLLC 12 100 Capitol Street, Suite 804 13 Charleston, WV 25301 14 Counsel for West Virginia Community Action Program 15 Partnership 16 17 E. DANDRIDGE MCDONALD, ESQUIRE 18 SUSAN RIGGS, ESQUIRE 19 Steptoe & Johnson, PLLC 20 Chase Tower, Eighth Floor 21 P.O. Box 1588 22 Charleston, WV 25326-1588 23 Counsel for Dominion and Dominion Hope 24 25
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1 INDEX TO WITNESSES 2 3 DISCUSSION AMONG PARTIES 9 - 10 4 WITNESS: Steven M. Kaz 5 DIRECT EXAMINATION 6 by Attorney Braswell 10 - 16 7 CROSS EXAMINATION 8 by Attorney McDonald 16 - 39 9 CROSS EXAMINATION 10 by Attorney Feinberg 39 11 REDIRECT EXAMINATION 12 by Attorney Braswell 40 - 41 13 RECROSS EXAMINATION 14 by Attorney McDonald 42
15 WITNESS: Byron L. Harris 16 DIRECT EXAMINATION 17 by Attorney Sade 43 - 58 18 CROSS EXAMINATION 19 by Attorney Hallinan 59 20 CROSS EXAMINATION 21 by Attorney Patterson 60 - 64 22 CROSS EXAMINATION 23 by Attorney McDonald 64 - 78 24 CROSS EXAMINATION 25 by Attorney Feinberg 78 - 118
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1 INDEX TO WITNESSES (cont) 2 CROSS EXAMINATION 3 by Attorney Braswell 118 - 121 4 EXAMINATION 5 by Chairman Albert 121 - 135 6 RECROSS EXAMINATION 7 by Attorney McDonald 135 - 138 8 RECROSS EXAMINATION 9 by Attorney Feinberg 138 - 140 10 RECROSS EXAMINATION 11 by Attorney Patterson 141
12 WITNESS: Deanna Lynne White 13 DIRECT EXAMINATION 14 by Attorney Sade 142 - 145 15 CROSS EXAMINATION 16 by Attorney McDonald 145 - 151 17 EXAMINATION 18 by Chairman Albert 152 - 157 19 RECROSS EXAMINATION 20 by Attorney McDonald 157 - 159 21 RE-EXAMINATION 22 by Chairman Albert 159 - 160 23 24 25
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1 INDEX TO WITNESSES (cont) 2 3 WITNESS: Paul P. Stewart, Jr. 4 DIRECT EXAMINATION 5 by Attorney Braswell 161 - 163 6 CROSS EXAMINATION 7 by Attorney McDonald 163 - 172 8 CROSS EXAMINATION 9 by Attorney Feinberg 172 - 175 10 CROSS EXAMINATION 11 by Attorney Sade 175 - 176 12 REDIRECT EXAMINATION 13 by Attorney Braswell 176 - 180 14 EXAMINATION 15 by Chairman Albert 180 - 188
16 WITNESS: Eric F. deGruyter 17 DIRECT EXAMINATION 18 by Attorney Braswell 189 - 191 19 CROSS EXAMINATION 20 by Attorney Patterson 191 21 CROSS EXAMINATION 22 by Attorney Feinberg 192 - 200 23 CROSS EXAMINATION 24 by Attorney McDonald 200 - 203 25
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1 INDEX TO WITNESSES (cont) 2 3 CROSS EXAMINATION 4 by Attorney Sade 203 - 207 5 EXAMINATION 6 by Chairman Albert 207 - 210 7 REDIRECT EXAMINATION 8 by Attorney Braswell 210 - 212 9 RE-EXAMINATION 10 by Chairman Albert 212 - 213 11 CERTIFICATE 214 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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1 E X H I B I T S 2 3 Page 4 Number Description Offered 5 Staff: 6 1A Testimony of Steven M. Kaz (rate) 9 7 1B Testimony of Steven M. Kaz (sale) 10 8 2A Testimony of Paul P. Stewart 160 9 2B Revised testimony of Paul P. Stewart 161 10 3 Testimony of Eric F. deGruyter 189 11
12 CAD: 13 2 Public testimony of Byron L. Harris 44 14 2 Confidential testimony of Byron L. 15 Harris 44 16 3 Direct testimony of Byron L. Harris 44 17 4 Direct testimony of Deanna Lynne White 144 18 5 Rebuttal testimony of Deanna Lynne 19 White 144 20 21 Hope Cross Examination: 22 1 Rule 42 excerpt 30 23 2 Cost of Service Study 37 24 25
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1 P R O C E E D I N G S 2 ------3 CHAIR: 4 Good morning, any preliminary matters 5 or do we just pick up with the witnesses? Okay. I guess 6 --- are following the schedule that was --- other than 7 taking Mr. Downey out of turn, are we back on the 8 schedule? Is that ---?
9 ATTORNEY MCDONALD: 10 Yes, sir. 11 CHAIR: 12 All right. So I guess, Mr. Kaz? 13 OFF RECORD DISCUSSION 14 ------15 STEVEN KAZ, HAVING FIRST BEEN DULY SWORN, TESTIFIED AS 16 FOLLOWS: 17 ------18 ATTORNEY BRASWELL: 19 Before I begin, Commission Staff has 20 asked to have Mr. Kaz's Rule 42 testimony premarked as 21 Staff Exhibit 1A, and provided that to the court 22 reporter. And also provided the court reporter a copy of 23 Mr. Kaz's sale case testimony. 24 (Staff Exhibit 1A marked for 25 identification.)
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1 CHAIR: 2 Hold on a second. I'm getting myself 3 organized here. Let me see if I can find it. Rule 42? 4 ATTORNEY BRASWELL: 5 Staff has provided the court reporter a 6 copy of the Rule 42, the rate case exhibit testimony, and 7 asked to have that marked as Staff Exhibit 1A. I'd also 8 ask the court reporter to premark a copy of the sales --- 9 the publicly disclosed sale case testimony as Staff 10 Exhibit 1B. 11 (Staff Exhibit 1B marked for 12 identification.) 13 DIRECT EXAMINATION
14 BY ATTORNEY BRASWELL: 15 Q. Good morning. Could you please state your name 16 for the record? 17 A. My name is Steven Kaz. 18 Q. Are you the same Steven M. Kaz who filed two 19 Direct testimony in these proceedings? 20 A. Yes, I am. 21 Q. And you have those in front of you this morning? 22 A. Yes, I do. 23 Q. Mr. Kaz, by whom are you employed and how long 24 have you worked there? 25 A. The Public Service Commission of West Virginia,
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1 and I've worked here since 1991. 2 Q. In what capacity do you work for the Commission? 3 A. I work on a wide range of issues, including 4 looking at the 4S recommendations concerning cost of 5 equity and capital structure. 6 Q. Do you have any changes to indicate to your 7 testimony this morning? 8 A. Yes, I do. On page three ---. 9 Q. Of which testimony? 10 A. Oh, I'm sorry. On my Direct for 087 --- 11 081783-G-42T. On page three, line ---.
12 ATTORNEY MCDONALD: 13 Well, could I ask a question? I'm a 14 little confused. There was a confidential Direct 15 testimony filed on April 24. Then there was a previously 16 filed confidential Direct testimony on May 20th. And 17 then there was a Direct testimony in both cases on April 18 24. Which one --- were there more or was that it? 19 ATTORNEY BRASWELL: 20 No. Let me clarify this for the 21 record. Commission Staff filed the Rule 42 exhibit as a 22 public document, and that's Staff Exhibit 1A, on April 23 the 24th. However, due to some pending motions for 24 confidential treatment, Staff Exhibit --- the sale case 25 testimony was originally filed as a confidential
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1 document. However, subsequently Steel River, then 2 BBIFNA, filed a letter before the Commission with the 3 Executive Secretary's office indicating that it released 4 the sale case testimony for public disclosure. 5 And Staff then filed the later version 6 of the sale case testimony. It's word for word exactly 7 the same except that there's a different cover. It's a 8 gray cover instead of a blue cover. And it indicates 9 that that testimony has been released for filing as a 10 public document.
11 CHAIR: 12 Is that 19 pages of questions and 13 answers or thereabouts? 14 ATTORNEY BRASWELL: 15 I'm discombobulated. It will take me a 16 minute. 17 ATTORNEY MCDONALD: 18 I thought it was two pages. 19 ATTORNEY BRASWELL: 20 It's two pages. I mean, it's very 21 brief. 22 CHAIR: 23 Okay. All right. I have that one.
24 ATTORNEY BRASWELL: 25 And that's the one we're moving as
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1 Staff Exhibit 1B. 2 CHAIR: 3 All right. 4 COMMISSIONER MCKINNEY: 5 Mine is still marked confidential. Is 6 that, the 1B still confidential? 7 ATTORNEY BRASWELL: 8 1B has a different cover, however the 9 watermark still indicates confidential.
10 CHAIR: 11 But it isn’t? 12 ATTORNEY FEINBERG: 13 But it is not confidential. 14 COMMISSIONER MCKINNEY: 15 That was the question. 16 BY ATTORNEY BRASWELL: 17 Q. All right, Mr. Kaz. 18 A. Page three, line 16. The number is 3.32. It 19 should read 1.14. 20 CHAIR: 21 Well, wait a minute. Page ---? 22 ATTORNEY MCDONALD: 23 I don’t have a page three.
24 CHAIR: 25 You're looking at the wrong one, I
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1 think. He's making corrections to the other one, I 2 think. 3 ATTORNEY BRASWELL: 4 He's making corrections to the longer 5 document. It is --- 6 CHAIR: 7 Staff what? 8 ATTORNEY BRASWELL: 9 --- 19 pages. It's Staff Exhibit 1A. 10 It's the rate case testimony.
11 CHAIR: 12 I thought 1A was the Rule 42. 13 ATTORNEY BRASWELL: 14 I'm sorry, Chairman. Let me correct 15 myself. Staff Exhibit 1A is Mr. Kaz's rate case 16 testimony. It's not the Rule 42. 17 CHAIR: 18 Hold on. Okay. We'll start all over. 19 Staff 1A marked is Kaz Direct. 20 ATTORNEY BRASWELL: 21 Yes, sir. 22 CHAIR: 23 But it's the three-page version?
24 ATTORNEY BRASWELL: 25 Staff Exhibit 1B is the sale case
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1 testimony. That's a three-page document. Staff Exhibit 2 1A is a 19-page document with attachments. And that's 3 his rate case testimony. 4 CHAIR: 5 Okay. Now, Staff 1B marked. And 6 that's Kaz --- three page. Now, the corrections you're 7 making are to 1A; is that correct? The 19-page document, 8 Mr. Kaz? 9 A. Yes, sir.
10 CHAIR: 11 All right. You ---. 12 A. I think I'm on the --- 13 CHAIR: 14 All right. 15 A. --- same page. 16 CHAIR: 17 Okay. 18 A. Page three, line 16. It should read short-term 19 debt be reflected at 1.10 percent. And the next line, 20 17, should read reflected at 5.92 percent. 21 BY ATTORNEY BRASWELL: 22 Q. Mr. Kaz, do you have any other corrections or 23 updates to your testimony? 24 A. No. 25 Q. If you were to provide the same testimony today,
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1 would you provide it the same way? 2 A. Yes, I would. 3 ATTORNEY BRASWELL: 4 Staff moves Staff Exhibit 1A and 1B 5 subject to Cross Examination and tenders the witness for 6 Cross Examination. 7 CHAIR: 8 All right. Without objection, it'll be 9 admitted. We'll let them start this time, them being the 10 Applicants. I'm sorry. 11 CROSS EXAMINATION
12 BY ATTORNEY MCDONALD: 13 Q. Good morning, Mr. Kaz. 14 A. Good morning, Mr. McDonald. 15 Q. And would you agree with me that there is a 16 relationship between the risk of an investment and its 17 expected return? 18 A. Yes, I would. 19 Q. The higher the risk, the higher the expected 20 return; correct? 21 A. Yes, sir. 22 Q. Do you agree that for any individual company, 23 the risk of its equity would always exceed the risk of 24 its debt? 25 A. I would agree in general with that statement.
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1 Q. So equity would always require the higher risk 2 premium, would it not? 3 A. Again, generally I would agree with that 4 statement. There are times such as the recent credit 5 crisis that would seem that the debt market has been 6 frozen and interest rates has just skyrocketed on the 7 cost of that debt. At this time, it seems that the fed 8 taxes have been working and we're seeing interest rates 9 coming down and money being freed up. 10 Q. In your previously confidential testimony, the 11 pro forma, you just --- in the pro forma, you displayed a 12 cost of debt for PH Gas at 7.04 percent and the cost of 13 equity is 6.72 percent. Does this violate the principle 14 we've just discussed? 15 A. The capital structure under PH Gas would just 16 basically --- their proposed capital structure at the 17 time really did not have enough time to --- or not enough 18 time, enough information to evaluate what their cost of 19 debt would be and essentially just recommend --- well, 20 didn’t even recommend, just presented their cap --- their 21 hypothetical capping structure as it was presented to us. 22 Q. Well, we're talking about the cost of debt 23 versus the cost of equity that you were recommending on 24 the SMK-2 Schedule 1. You show the cost of debt higher 25 than the cost of equity; correct?
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1 A. Yes. But again, Staff has no idea what Steel 2 River can borrow money at. 3 Q. Why is that? 4 A. They've not made any borrowings that they've 5 presented to Staff. 6 Q. Are you aware that Steel River has had its 7 financing rated by Moody? 8 A. No, I was not. 9 Q. You're not aware of that? 10 A. No, sir. 11 Q. Turn to SMK-1. This is your public testimony, 12 your Staff Exhibit 1A. SMK-1 Schedule 2. Are you there? 13 A. Yes, sir. 14 Q. There are three companies displayed on this 15 schedule for whom you calculated a DCF cost of equity 16 less than the 7.04 percent cost of debt that you 17 displayed for PH Gas; correct? 18 A. Yes, that's correct. 19 Q. And there's one company for whom you calculated 20 a DCF cost of equity less than the 5.92 percent cost of 21 debt you displayed for Dominion Hope Gas; correct? 22 A. Yes, sir, that's correct. 23 Q. This, too, violates the basic principle we 24 discussed, does it not? 25 A. I don’t know because I'm not aware of what
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1 Nicor, that was the 5.73 percent cost of equity, what 2 they can issue debt for at this time. 3 Q. Nicor is the most troubled of the companies in 4 your sector, is it not? 5 A. What do you mean by troubled? 6 Q. It has, according to your calculations, the 7 lowest cost of equity. It has ---. It is the least 8 financially strong. Do you agree with that, of the 9 companies in your sample? 10 A. No, I don’t. 11 Q. Okay. Your DCF cost of equity estimates are 12 based upon the average daily closing price for 13 weeks, 13 ending on April 10, 2009, and April 17, 2009, you have a 14 paid dividend; correct? 15 A. Yes, sir. 16 Q. Can you tell us what the average bond deal was 17 for the lowest-rated, investment-rated utility bonds 18 during the same period? 19 A. No, I'm not aware of that. 20 Q. So you agree with Mr. Vilbert that for the 15- 21 day period ending April 24, 2009, it was 8.05 percent? 22 A. It's quite possible. 23 Q. Your calculated DCF average cost of equity is 24 7.66 percent, page eight, line 15 on your exhibit. 25 Doesn’t this mean that your estimated cost of equity is
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1 less than the cost --- the corresponding cost of debt at 2 the same time? 3 A. Can you repeat that question? I got lost. 4 Q. Page eight, line 15. 5 A. Page eight, okay. 6 Q. And also SMK-1 Schedule 2. Both show your DCF 7 average cost of equity at 7.66 percent; correct? 8 A. Yes. 9 Q. Doesn’t this mean that your estimated cost of 10 equity, your estimated cost of equity, is less than the 11 corresponding cost of debt at the time, if you accepted 12 the corresponding cost of debt at 8.05 percent? 13 A. And what was the 8.05 referencing? 14 Q. The average bond deal for the lowest-rated, 15 investment-rated utility bonds during the same period, 16 the two years, to calculate your DCF cost of equity 17 estimation? 18 A. Yes, the DCF would have been lower than that. 19 But at the same time, we don’t know what the companies in 20 the sample were able to issue their debt, at which rate. 21 Q. Well, 8.05 percent is the average bond --- well, 22 strike that. 23 In your CAPM analysis, SMK-1 Schedule 3, all of 24 your companies' cost of equity estimates are below 6.49 25 percent; correct?
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1 A. Yes, they are. 2 Q. Do you know that at the time of your estimates, 3 Moody, CLO and A-rated utility debt was 6.49 percent? 4 A. I will believe you when you say that. 5 Q. I'm sorry? 6 A. I believe you when you say that. 7 Q. If that’s the case, isn't the entire CAPM 8 analysis flawed in that the cost of debt equity --- the 9 cost of debt is greater than the cost of equity? 10 A. No. Again, I don’t believe that's true. At 11 that time --- during the time that the CAPM was 12 calculated, I don’t believe we know which --- what each 13 of the companies in the sample were able to issue debt 14 at. We've seen in this proceeding that recently Dominion 15 Resources has been able to issue debt at 5.22 percent. 16 At the same time, I believe, yesterday the testimony was 17 that BBB municipal utility bonds had an average yield of 18 6.62 percent. 19 Q. Say that again. 20 A. We heard earlier in this hearing that Dominion 21 Resources had been able to issue debt at 5.22 percent. 22 And yesterday we heard testimony that BBB utility bonds 23 had a yield of 6.62 percent. So again, the company that 24 we're looking at, Dominion Resources, is able to issue 25 debt based on their financial strength at a lower rate
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1 than the average rate of BBB municipal utility bonds. 2 Q. Well, your CAPM calculation on SMK-1 Schedule 3 3 is less than 6.62 percent, isn’t it? 4 A. Yes, it is but it's not lower than 5.22 percent 5 that Dominion Resources is able to issue debt. 6 Q. You used a sample group and made calculations on 7 each to arrive at an average cost of equity to form your 8 recommended cost of equity; is that correct? 9 A. Yes, sir. 10 Q. I didn’t see in your analysis any mention of 11 study of differences and financial risks between the 12 sample companies. Did you study that? 13 A. Actually, to be included in the sample group, 14 all companies had to have at least 50 percent of their 15 revenues derived from natural gas distribution companies, 16 which would match with this company with Hope Gas, and at 17 least a BBB S&P rating. 18 Q. Would a company with a 40-percent equity ratio 19 have the same risk as a company with a 60-percent equity 20 ratio? 21 A. Obviously the higher group --- it kind of 22 depends on a number of things. Generally, a company with 23 a higher debt ratio would be more risky simply because 24 interest payments remain constant and there are 25 fluctuations in revenues that would --- no matter how
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1 much revenue is brought in, those payments still need to 2 be paid. Though, for a regulated utility, the principal 3 still applies but it's not as extreme in that if 4 utilities seem to be having cash flow problems, they can 5 apply to have their rates increased. 6 Q. I think you said that a company, even a gas 7 utility, with an equity ratio of 40 percent, they have a 8 different risk profile --- will have a different risk 9 profile, than a company with a 60-percent equity ratio; 10 correct? 11 A. Yes. 12 Q. But you did not consider the different 13 capitalization ratios among your sample of companies in 14 analyzing your cost of equity for Hope, did you? 15 A. No, I didn’t. 16 Q. Mr. Kaz, do market conditions have an impact on 17 the cost of capital? 18 A. Yes. 19 Q. How would you describe current market 20 conditions? 21 A. The market right now is somewhat volatile. But 22 it does seem that many economists are predicting that we 23 are at the end of the recession. 24 Q. Investors are risk-averse, are they not? 25 A. Yes, they are.
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1 Q. Would you agree that being risk-averse, 2 investors prefer less risk to more risk for the same 3 level of return? 4 A. Yes. 5 Q. Does greater market volatility mean more risk 6 for investors? 7 A. It does in the short term. But with the --- you 8 can see in the CAPM model, the sample of gas companies 9 that their betas are --- the average is .67, which is 10 less than the average market risk of one. In other 11 words, ---. 12 Q. Utilities have to compete with non-utilities for 13 investor capitals, do they not? 14 A. Yes, they do. And they're traditionally less 15 risky than other companies. They're less risky than the 16 market as a whole. 17 Q. Do you agree that greater volatility means 18 greater risk for investors? 19 A. In the short term. 20 Q. If market volatility means greater risk and 21 greater risk means that investors require higher returns 22 than they do at less volatile times, then what impact 23 does the volatile market have on the cost of capital? 24 A. Investors evaluate the market risk against other 25 entities that they can invest in, such as debt, and look
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1 at the returns being returned by the debt and the risk 2 associated with it, as opposed to investing in equity and 3 the risk that is associated with investing in equity. In 4 other words, if the recent returns on --- the yield that 5 you can get on investing in debt is lower, I believe that 6 the investors expect a lower yield from equities or will 7 be satisfied with a lower yield on equities. 8 Q. Did you just say that if investors can invest in 9 debt at lower risk, they will not invest in equity? 10 A. No, I didn’t. I was just trying to say that the 11 proportion or the risk premium that investors expect to 12 be given between equities and debt will remain the same. 13 So if the yield in investing in debt is down, investors' 14 expectations on the term of investing in equities would 15 stay proportionate. 16 Q. You didn’t make any adjustment for volatility in 17 the stock market when you were calculating your estimated 18 cost per capital, did you? 19 A. Well, any adjustments for volatility would be 20 accounted for in betas of the sample group. 21 Q. What is the capital structure that you recommend 22 for Hope? 23 A. Staff's recommended capital structure is 17 --- 24 16.97 percent short-term debt, long-term debt at 41 25 percent and equity at 42 percent.
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1 Q. Do you agree with the basic principle of 2 corporate finance that recommends that companies match 3 the term of the financing with the life of the assets 4 being financed? 5 A. Yes. 6 Q. Does matching the terms of the debt with the 7 life of the assets financed thereby lower risk for a 8 company? 9 A. I don’t know that it lowers risk for a company. 10 But when an asset is fully depreciated, it will be paid 11 for. I mean, I don’t think the Commission or its Staff 12 would recommend financing a five-year asset with a 13 30-year loan because when the asset is done and no longer 14 able to be used to produce revenues, the company would 15 still be --- would still have 25 more years of debt 16 payments to make. 17 Q. Pretty risky to finance a company with 18 short-term debt, isn’t it, because of the swings in the 19 cost of short-term over relatively short periods of time? 20 A. It could be. 21 Q. I did not see in your work a study of the short- 22 term portion --- short-term debt portion of the 23 capitalization of your sample group. Did I miss it or is 24 it not there? 25 A. You did not miss it.
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1 Q. And you assign a cost of 1.1 percent to your 2 recommended short-term capital in Hope's capital 3 structure; correct? 4 A. Yes, sir. That's based on the actual rate 5 experienced by Hope in the first quarter of 2009. 6 Q. It's not the actual cost of short-term debt 7 experienced by Hope during the test year, is it? 8 A. No, it's not. 9 Q. That number is displayed under SMK-1 Schedule 1; 10 correct? 11 A. Yes, sir. 12 Q. And that was 5.2 percent? 13 A. Yes, sir. 14 Q. And Dominion Resources' short-term debt cost was 15 4.93 percent; correct? The same schedule. 16 A. I'm not sure where the 4.93 is coming from. 17 Q. Look at SMK-1 Schedule 1. 18 A. Oh, yes, sir. 19 Q. Middle of the page, 4.93. 20 Q. What is the prime rate of today's gas? 21 A. I believe it's about 3 percent or 3.25 percent. 22 Q. Tell the Commission what the prime rate is. 23 A. It's about 3 percent or 3.25 percent. 24 Q. No, no. Tell them --- define ---. 25 A. I'm sorry.
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1 CHAIR: 2 I was going to say asked and answered, 3 but ---. 4 A. It's what banks will lend to their best 5 customers, the rate at which banks will lend to their --- 6 the average rate that banks will lend to their best 7 customers. 8 BY ATTORNEY MCDONALD: 9 Q. So if the prime rate's 3.0 or 3.25 percent, Hope 10 can't borrow money at 1.1 percent, can they? 11 A. Well, Hope participates, if I understand it 12 correctly, in a money pool with Dominion Natural 13 Resources. And Dominion Natural Resources is able to --- 14 and it appears from the information provided, they can 15 borrow at much lower rates than prime. 16 Q. How about Hope going forward after the sale? 17 Will Steel River Hope be able to borrow money from the 18 Dominion money pool? 19 A. Depending upon the agreement they reach. But I 20 would anticipate not. 21 Q. Mr. Kaz, you say at page two, line 11, that the 22 cost of capital represents a fair rate of return that 23 will not only pay for debt but will also compensate 24 equity owners commensurate with returns on investments of 25 comparable risk; correct?
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1 A. Yes, sir. 2 Q. And that this fair rate of return will enable 3 the company to attract required capital; correct? 4 A. Yes, sir. 5 Q. Thus I assume that you would agree, would you 6 not, that a utility's rates should permit it to collect 7 sufficient revenue for operating expenses and to cover 8 the capital cost of the business, including service on 9 the debt and dividends on the stock; correct? 10 A. Yes, sir, I agree. 11 Q. And that the return to the equity owner should 12 be commensurate with returns on investments and other 13 enterprises having the corresponding rate; correct? 14 A. Yes, sir. 15 Q. And be sufficient to assure confidence in the 16 financial integrity of the enterprise so as to maintain 17 its credit and to attract capital? 18 A. Yes, I agree. 19 Q. Pretty principle --- basic principles of utility 20 rate makers, are they not? 21 A. Yes, sir. 22 Q. Mr. Kaz, I was troubled by your testimony in a 23 number of respects. And I sat down the other day and 24 tried to draw some of your numbers together and try to 25 make sense of them. I've just passed out a document that
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1 I would like to have marked as Hope Cross Examination 2 Exhibit Number One. 3 (Hope Cross Examination Exhibit One 4 marked for identification.) 5 BY ATTORNEY MCDONALD: 6 Q. You recognize the second page of this exhibit, 7 do you not, Mr. Kaz? 8 A. Yes, sir. 9 Q. What is that? 10 A. It is long-term debt outstanding that was 11 started by Hope Gas and what the CAD gave to us. 12 Q. Well, it's page one of Statement C of Rule 42. 13 A. Okay. Yeah, it is. Okay. 14 Q. This document shows, as required by Commission's 15 rule, Hope's long-term debt at March 31, 2008; right? 16 A. Yes. 17 Q. This little spreadsheet that you prepared, let's 18 take a look at the first block there called long-term 19 debt cost. 20 A. Can I ---? 21 Q. Staff has recommended a rate base of $81 22 million. 23 A. Can I just make one clarification? In regard to 24 Hope's cost of debt at March 31, '08, Staff has made an 25 adjustment in its recommended capital structure that
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1 substitutes, it's in my testimony, available debt 2 --- well, basically it's in my testimony. And our 3 recommended cost of debt does not include --- if you look 4 at the --- there is a $40 million issue. It's been 5 discussed before in this proceeding. And Hope has the 6 effective cost rate at 6.97 percent. Staff received a 7 lower number and it's proposed capital structure or 8 recommended capital structure. 9 Q. I'm not sure what that clarifies. I understand 10 that Staff does not like what it sees on Hope's book. 11 And I understand that Staff has changed in its judgment 12 of what's on Hope's book. 13 A. Right. 14 Q. But Hope has --- well, Hope had on March 31, 15 2008, the long-term debt outstanding shown on the second 16 page of this exhibit, did it not? 17 A. Yes, I just wanted to point out the adjustment 18 that we made in our recommended report of --- 19 Q. Yes, I'm aware of that. 20 A. --- the long-term cost of debt. 21 Q. Now, let's look at the first block of this. 22 I've displayed correctly, have I not, Staff's rate base 23 and the long-term debt component of its cost of capital 24 calculation, 2.43 percent for debt, SMK-1 Schedule 1. 25 A. Yes, sir.
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1 Q. Is that correct? 2 A. Yes, it is. 3 Q. That means, does it not, that Staff is 4 recommending that this Commission allow Hope to earn 5 about $1.97 million to service its long-term debt; 6 correct? 7 A. Yes, sir. 8 Q. Hope's actual long-term debt cost is $4.48 9 million, is it not? 10 A. Yes, according to its filing statement, yes. 11 Q. That means that under Staff's rate of return 12 recommendation, Hope would fall short of recovering its 13 cost of long-term debt by two and a half million dollars, 14 does it not? 15 A. It appears that way from the exhibits you have 16 given me. 17 Q. Did you know how short of recovering its cost of 18 amended long-term debt per the Staff calculation that 19 your recommendations generate? 20 A. No, sir. 21 Q. Will you accept, subject to check, that even if 22 the Commission goes along with your recommendations that 23 reprice Hope's debt, Staff's recommendations still keeps 24 Hope $1,800,000 short of recovery it's cost of long-term 25 debt.
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1 A. I believe that, subject to check. 2 Q. The next little box shows long-term debt 3 interest coverage, post tax. You can see the 4 calculations that I've made there, rate base times rate 5 of return generates a post-tax operating income of $4.4 6 million; correct? 7 A. Yes. 8 Q. Its actual long-term debt cost is $4.48 million, 9 so it has a post-tax long-term debt interest coverage of 10 less than one under your recommendation, does it not? 11 A. It appears that way from the exhibit. 12 Q. Much of this data is taken from the last several 13 sheets of your exhibit. That's what I call sort of the 14 test or the reasonableness of your recommendation, where 15 you’re judging it by various measures; correct? 16 A. Yes, sir. 17 Q. And why do you present that? 18 A. In order to show what Staff's recommendations 19 will produce as far as interest coverage as well as 20 dividends and retained earnings potential and also cash 21 flow. 22 Q. It's sort of an end-result analysis, is it 23 not, --- 24 A. Yes, sir. 25 Q. --- intended to form information of the
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1 reasonableness of your overall recommended --- overall 2 rate of return recommendation? This calculation in block 3 two shows a post-tax long-term debt interest coverage of 4 .985, not the 3.57 that was shown on your SMK-1 Schedule 5 5, sheet one of three. Let's move on to pre-tax 6 long-term debt coverage. You see the calculations that 7 are shown there? 8 A. Yes, sir. 9 Q. I calculate a 1.57 times pre-tax long-term debt 10 coverage, not the 3.57 shown on your SMK-1 Schedule 6, 11 sheet one of three. Isn't this the actual picture of 12 your recommendation? 13 A. I don’t know that to be true. I'd have to 14 review it more closely. 15 Q. The next --- fourth block on my spreadsheet 16 corresponds somewhat in your appendix SMK-1 Schedule 5, 17 sheet two of three, does it not? 18 A. Yes, it does. 19 Q. Here we're trying to look at --- what amount of 20 funds under Staff's recommendations is available to the 21 company for dividends and retention of funds for 22 construction and other purposes; correct? 23 A. Pardon me? Can you repeat that? 24 Q. This view attempts to calculate what funds after 25 the payment of debt are available to the company to
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1 retain the pay dividend; right? 2 A. Yes. 3 Q. That's what you show on Schedule 5, sheet two of 4 three? If you look at the calculations that I've made, 5 Staff suggests a net operating income of $4.41 million; 6 correct? 7 A. Yes. 8 Q. Given its actual long-term debt cost of $4.48 9 million, that leaves no money for dividends and 10 retention, does it? 11 A. According to the exhibit that you presented, no, 12 it doesn’t. But interest and expense and debt coverage 13 are not just --- it's not paid in a vacuum. Interest 14 expense has an effect on both state and federal taxes. 15 More interest reduces taxes, which would leave more money 16 for both interest coverage as well as for the payment of 17 dividends and increasing retained earnings. 18 Q. Well, I appreciate that comment. But under your 19 recommendation, given Hope's actual test year cost of 20 long-term debt, your recommendation leaves no money for 21 dividends or internal uses? 22 A. According to the exhibit that you've given me, 23 that's correct. 24 Q. Return on equity is important, isn’t it, Mr. 25 Kaz?
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1 A. Yes, it is. 2 Q. Return on real equity, actual equity. This next 3 calculation looks at the Staff's rate based, the Staff 4 equity rated portion of the cost of capital, 2.82 5 percent; that's correct, is it not, in SMK-1 Schedule 2? 6 A. Yes, it is. 7 Q. That means that under the Staff recommendation, 8 Commission should order a return to equity of $2.29 9 million; correct? 10 A. I believe that's correct. 11 Q. Now, look at the Staff Rule 42 exhibit, 12 Statement F, page 2 of 2, line 72, determined Hope's 13 actual equity at 3/31/08, do you accept that it was --- 14 A. Yes. 15 Q. --- $69,300,000? 16 A. Yes, I accept that. 17 Q. Does that not mean that under Staff's 18 recommendation, the return to equity is 3.298 percent? 19 A. Again, according to your exhibit, that's what 20 the number that --- that’s the number that you have on 21 your exhibit for the Staff recommended return and actual 22 equity. 23 Q. That's quite different from the 6.72 percent you 24 purport to recommend, isn’t it? 25 A. Yes.
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1 Q. Your appendix SMK-1 Schedule 5, sheet three of 2 three is your cash flow end result analysis; correct? 3 A. Yes. 4 Q. You conclude that using your numbers, Hope can 5 finance 90 percent of its capital additions through 6 internally generated fund; right? 7 A. Yes. 8 Q. That's not true, is it? Given Staff's rate 9 base, Staff's equity recommended return, Staff's 10 recommended retention rate and the depreciation cash 11 flow, the cash available for construction after dividends 12 is $6.77 million; right? 13 A. Based on your exhibit, that's correct. 14 Q. That's only 58 percent of Hope's 2009/2010 15 capital additions; isn’t it? 16 A. Again, based on your exhibit, that's correct.
17 ATTORNEY MCDONALD: 18 Your Honor, I've passed out a single 19 sheet titled Dominion Hope Case Number 050304 cost of 20 service, attachment one. I ask that this be marked for 21 identification as Hope Cross Examination Exhibit Number 22 Two. 23 (Hope Cross Examination Exhibit Two 24 marked for identification.) 25 CHAIR:
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1 It is so marked. 2 BY ATTORNEY MCDONALD: 3 Q. Do you recognize this document, Mr. Kaz? 4 A. It looks like it's a cost of service 5 calculation. 6 Q. This is the elusive cost of service that was 7 attached to Hope's 2005 rate case stipulation; right? 8 A. I'll agree to that. 9 Q. This sheet shows the elusive return to be $9.36 10 million; correct? 11 A. Yes, sir. 12 Q. Your recommended return in this case is $4.4 13 million; correct? 14 A. Yes, sir. 15 Q. Do you believe Hope's investors are entitled to 16 only half as much return in 2009 as they were in 2005? 17 A. I don’t know. 18 Q. The SMK-1 Schedule 1, turn to that, please. 19 Q. Are you there? 20 A. Yes, sir. 21 Q. I see that you show Staff recommended total 22 capital for Hope of $155 million; correct? 23 A. Yes, sir. 24 Q. It's true, is it not, that Staff is recommending 25 that the Commission allow Hope to service only $81
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1 million of that capital service since Staff's rate base 2 is $81 million; isn't that correct? 3 A. Yes, sir. 4 ATTORNEY MCDONALD: 5 No further questions. 6 CHAIR: 7 Mr. Feinberg? 8 ATTORNEY FEINBERG: 9 Thank you, Your Honor. 10 CROSS EXAMINATION
11 BY ATTORNEY FEINBERG: 12 Q. Mr. Kaz, I just want to clear up one thing that 13 I'm sure --- that I want to make sure is here on the 14 record. One, at some point Mr. McDonald said something 15 to you about short-term debt, and you referenced the 16 Dominion money pool. And I want to make sure your answer 17 was clear. There's no access to that money pool by Steel 18 River? I mean, his hypo was Steel River post closing. 19 There's no suggestion anywhere that Steel River's going 20 to have access to the Dominion money pool; right? 21 A. No, I've not seen that anywhere. 22 ATTORNEY FEINBERG: 23 Thank you. That's all, Your Honor.
24 CHAIR: 25 Mr. Patterson, do you have anything?
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1 ATTORNEY PATTERSON: 2 No questions. 3 CHAIR: 4 Ms. Hallinan? 5 ATTORNEY HALLINAN: 6 No questions. Thank you. 7 CHAIR: 8 CAD?
9 ATTORNEY SADE: 10 No questions. 11 CHAIR: 12 All right. Commissioner? 13 COMMISSIONER MCKINNEY: 14 No questions. 15 COMMISSIONER STAATS: 16 No questions. 17 CHAIR: 18 All right. Any Redirect? 19 ATTORNEY BRASWELL: 20 Just one or two questions. Thank you. 21 REDIRECT EXAMINATION 22 BY ATTORNEY BRASWELL: 23 Q. Mr. Kaz, why don’t you clarify --- I believe you 24 attempted to explain it. Clarify why you did not use 25 Dominion Hope's short-term --- test year actual rate of
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1 long-term debt in your --- in the check coverage. 2 A. In 2004, Hope filed a petition in order to 3 retire short-term debt outstanding that was $40 million 4 at the time with long-term debt, and they proposed using 5 6.97 percent long-term debt that I guess it previously 6 had issued in, I believe it was 2001. But also at that 7 time, they had a portion of a $2 million issuance that 8 was issued in 2003 that had a yield of 5.19 percent. 9 And Staff believes it's appropriate that the $40 10 million carried on Hope's books at 6.97 percent should be 11 --- should, in fact, have affected a yield of 5.9 --- 12 5.19 percent since the money was available at the time of 13 the refinancing of the short-term debt. And at the time, 14 it was Staff's concern that the more expensive long-term 15 debt would be pushed down on Hope and that the cheaper 16 long-term debt would be used by non-regular things. 17 Q. So just to --- that was a pretty long 18 explanation. Just to clarify, are you indicating that 19 you imputed a long-term debt rate for your 20 recommendations on rate of return? 21 A. Yes, only for the $40 million outstanding --- 22 the outstanding $40 million.
23 ATTORNEY BRASWELL: 24 Okay. Thank you. 25 ATTORNEY MCDONALD:
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1 I have a follow up, Your Honor. 2 CHAIR: 3 Have you finished? 4 ATTORNEY BRASWELL: 5 Yeah, thank you. 6 CHAIR: 7 Go ahead, Mr. McDonald. 8 RECROSS EXAMINATION
9 BY ATTORNEY MCDONALD: 10 Q. You just answered your Counsel that there was 11 available 5.19 percent debt at the time. And you also 12 testified to that on page five, line seven. Were you in 13 the hearing room when Mr. McKeown testified? 14 A. I don’t believe I was in the hearing. I'm not 15 sure even if I was listening --- I've listened to a lot 16 of the hearing upstairs in my office. 17 Q. Did you hear Mr. McKeown testify that there were 18 no funds available from that 5.19 percent issue at the 19 time for Hope? 20 A. No, I didn’t. 21 ATTORNEY MCDONALD: 22 Thank you. 23 CHAIR: 24 All right. Mr. Kaz, you're excused. 25 Call your next witness then.
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1 ATTORNEY BRASWELL: 2 Your Honor, Mr. Kaz testified with Mr. 3 Short as part of the original scheduled rate of return. 4 Actually, the CAD witnesses are next on the witness 5 schedule. 6 CHAIR: 7 That's fine. 8 ATTORNEY SADE: 9 CAD calls Byron Harris to the stand. 10 ------11 BYRON L. HARRIS, HAVING FIRST BEEN DULY SWORN, TESTIFIED 12 AS FOLLOWS: 13 ------14 DIRECT EXAMINATION
15 BY ATTORNEY SADE: 16 Q. Good morning, Mr. Harris. 17 A. Good morning. 18 Q. Would you state your name for the record? 19 A. Byron L. Harris. 20 Q. And by whom are you employed? 21 A. The Consumer Advocate Division of the Public 22 Service Commission of West Virginia. 23 Q. Are you --- excuse me a minute. 24 OFF RECORD DISCUSSION 25 BY ATTORNEY SADE:
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1 Q. I'm trying to remember the Chairman's admonition 2 not to talk while I walk around. Are you the same Byron 3 Harris who filed three pieces of testimony in this case? 4 A. Yes, I am. 5 Q. And do you have those pieces of testimony in 6 front of you? 7 A. I just have my confidential of the one for the 8 acquisition case --- the rate case. 9 Q. Those three pieces of testimony consist of 10 public and confidential versions of testimony in the sale 11 case and a public version of your testimony in the rate 12 case? 13 A. That's correct.
14 ATTORNEY SADE: 15 Mr. Chairman, I had those pieces of 16 testimony marked. The public version of the sale case 17 testimony is CAD One (sic). The confidential version of 18 the sale case testimony as CAD Two. And the sole version 19 of the Mr. Harris' testimony of the rate case as CAD 20 Three. 21 (CAD Exhibits Two through Three marked 22 for identification.) 23 BY ATTORNEY SADE: 24 Q. And taking them one by one, do you have any 25 changes or modifications you wish to make to CAD One,
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1 which is the public version of the sale case testimony? 2 A. Only one typo. And that would be --- I believe 3 this would apply to both versions of the testimony on 4 page four, line nine. The word and should be replaced 5 with the word can. 6 Q. So that would be on page four, line nine of CAD 7 One and page four, line nine of CAD Two? 8 A. Yes. 9 Q. Let me ask you, is there anything peculiar or 10 particular about your confidential version, CAD Two of 11 the sale case testimony? 12 A. Well, it contains confidential information 13 supplied by BBIFNA, which would be confidential to 14 Dominion, and not any of the parties who did not sign a 15 protective agreement with BBIFNA. 16 Q. And by confidential, too, you mean that the 17 information --- strike that. 18 You mean that that version of the testimony was 19 not provided to either Hope or any other party that had 20 not executed a protective agreement? 21 A. That's correct. 22 Q. Is it the case that since you filed that 23 testimony, BBIFNA has removed or withdrawn its request 24 for protective treatment of a large number of its copies? 25 A. Of some but not all.
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1 Q. And would that change in its position on 2 protected or confidential materials have any impact on 3 your confidential testimony in the sale case? 4 A. Other than removing the term begin confidential 5 and end confidential, no. 6 Q. Have you been able to go through your testimony 7 and parse out, or pick out, which particular confidential 8 sections are no longer confidential because of BBIFNA's 9 actions --- 10 A. No, I haven’t. 11 Q. --- in withdrawing ---? 12 A. No, I have not. 13 Q. So would it be safe to say that we are going to 14 have to deal with that kind of by Cross Exam question by 15 Cross Exam question? 16 A. Yes. 17 Q. And is there any one particular document that 18 you can recall that remains confidential that may have 19 been addressed in your confidential testimony? 20 A. I believe my exhibit --- I believe it was BLH 5, 21 which is the letter of intent that PPl Energy costs 22 remain confidential. 23 Q. Subject to the modification or the typo you 24 corrected in both your public and confidential versions 25 of the sale case testimony, would your answers to the
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1 questions posed in those versions of the testimony be the 2 same today as they were when you filed the testimony? 3 A. One other thing I've forgotten. Yes, except of 4 course I'll have references to Babcock and Brown and 5 BBIFNA would now be Steel River. 6 Q. And is the information provided in your answers, 7 subject to those amendments or modification that you just 8 indicated, true and correct to the best of your 9 knowledge? 10 A. Yes. 11 Q. Will you adopt these particular pieces of the 12 testimony as your testimony in this proceeding? 13 A. Yes, sir. 14 Q. Turning to CAD Three, the rate case testimony. 15 There's only one version; correct? No public and 16 private, just one version of the testimony? 17 A. Yes. 18 Q. Any changes or modifications to that testimony? 19 A. Yes, on page two, lines 20 and 21. The word 20 decrease is there. It should be increase. I wish it was 21 as filed, but unfortunately not.
22 ATTORNEY MCDONALD: 23 I'm sorry. Did you say --- what did 24 you say? 25 A. The word decreases should be increases.
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1 ATTORNEY MCDONALD: 2 Yes, I understand that. You said you 3 were sorry that it's not a decrease? 4 A. Yes, as an advocate for residential customers, I 5 always prefer decreases over ---. 6 ATTORNEY MCDONALD: 7 Okay. 8 A. On page five --- oh, I'm sorry. On page 16, 9 line five. The parentheses --- I think in particular to 10 the parentheses after one half to one percent should be 11 stricken.
12 BY ATTORNEY SADE: 13 Q. And not replaced? Just eliminated? 14 A. It would be easier than trying to explain --- 15 move the decimal point around. 16 Q. Any other changes to that? 17 A. That's it. 18 Q. And if you were asked the same questions today 19 with respect to this testimony considering the 20 modifications we just made, would your answers be the 21 same? 22 A. Again, with the caveat any reference to BBIFNA 23 is now Steel River. 24 Q. And is the information in this testimony 25 provided in response to the questions asked and your
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1 answers, I guess, true and correct to the best of your 2 knowledge? 3 A. Yes. 4 Q. Do you adopt it as your testimony in this 5 matter? 6 A. I do. 7 ATTORNEY SADE: 8 CAD would move the introduction of 9 these exhibits, subject to Cross. And Mr. Harris is 10 available. I'm sorry? 11 A. The Klink ---?
12 ATTORNEY SADE: 13 Yes, I'm sorry. My apologies. 14 BY ATTORNEY SADE: 15 Q. Do you recall that Mr. Klink during his 16 appearance on the stand gave testimony regarding an offer 17 made somebody regarding credit involving the transition 18 services agreement between Steel River and Dominion? 19 A. Yes, I do. 20 Q. And do you recall if the Commission provided 21 interveners and Staff with an opportunity to conduct 22 Cross Examination on the --- what amounts to what is 23 characterized, I guess, as the Supplemental testimony of 24 Mr. Klink? 25 A. Yes.
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1 Q. I'd like to ask you a few questions about that, 2 if I may. Do you believe that the $8.7 million credit 3 spread out over 18 months is sufficient to outweigh the 4 financial harms that will occur as a result of the 5 acquisition? 6 A. No, I do not. But the testimony demonstrates 7 that the harms would outweigh that amount, although the 8 $8.7 million sounds like a lot of money to me. I do 9 appreciate any time we can have credit offered like that 10 and not deemed substantial. But just to cite one 11 example, as contained in the testimony of Ralph Smith, 12 who lost the 338 election and the concomitant loss of 13 accumulated deferred income taxes and accumulated 14 deferred investment tax credits results in the total 15 cumulative loss that there is between $27 million and $40 16 million. 17 Those losses phase out over, I think in this 18 schedule, an 18-year period. So obviously, the $8.7 19 million credit for a one and a half year period does not 20 compare to that. In the first --- depending on the rate 21 of return that is used, in the first year, the revenue 22 requirement impacted the loss factors is from $2.3 to 23 $3.4 million. So even though we would have a credit for 24 $8.7 million, there's 18 months beyond that period that 25 we would have --- for many years beyond, we would have a
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1 loss to ratepayers for those months. 2 There are also obviously other issues that have 3 been raised in this case that would result in increased 4 cost to ratepayers. Steel River filed the Rule 42 that 5 was filed in December reflecting Steel River's ownership 6 used the same long-term debt cost as were convened in 7 Hope's Rule 42. Mr. Cordiano's rebuttal testimony says 8 that Steel River cannot obtain long-term debt at the 9 rates available to Dominion, and that those rates could 10 be higher. Those are obviously additional costs to 11 ratepayers. 12 One issue not addressed by the CAD, but 13 addressed by Staff, is the $4.2 million in reserve from 14 the tax reformat that would disappear in --- after the 15 sale. That would be a loss to ratepayers. Also there's 16 --- another issue addressed by Staff that's not addressed 17 by the CAD would be what we called in the equitable 18 proceedings, open loan. Dominion has received 19 approximately $30 million from ratepayers for the cost of 20 post-retirement benefits that they have not paid out. 21 That is a loan from ratepayers to the company. And the 22 Staff proposes to reimburse ratepayers by deducting that 23 amount from rate base, the current interest on that loan. 24 That would also disappear with the sale. 25 Q. I'm curious. Have you calculated the dollar
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1 figure that you attached to the harms that will occur 2 that you used in your calculation in comparing the 3 benefit that Mr. Klink has alleged will come from this 4 offer? 5 ATTORNEY MCDONALD: 6 Objection. This is absolutely new 7 testimony, and should not be admitted. Mr. Harris has 8 had lots of opportunities after studying the filing in 9 this case and the Direct testimonies to put a value on 10 the harms which he has recognized previously. And he's 11 not done so. And I think for him to be permitted to do 12 so now would be unfair to us unless we had a chance to 13 understand how he made his calculations and to study the 14 work papers and to be able to respond.
15 ATTORNEY SADE: 16 My response to that would be only new 17 information is the product or the sum of the additions, 18 the cost of which has already been identified in 19 testimony. I'm simply asking him to do the math so that 20 he can indicate what the offset or comparison is to Mr. 21 Klink's professed benefit from this last-minute offer. 22 ATTORNEY MCDONALD: 23 That's not so. The only quantification 24 that the Consumer Advocate has put into the record has 25 been Mr. Smith's late filed testimony on 338.
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1 CHAIR: 2 All right. We're going to take a break 3 for about five minutes. We'll be back. 4 ATTORNEY SADE: 5 Your Honor, if it will make this 6 simpler, I don’t know if you have any other agenda in 7 mind, but if it's simply to address this issue, I'm happy 8 to withdraw the question if that'll simplify the matter. 9 So we'll let the testimony stand on its own.
10 CHAIR: 11 So it eliminates the need for a brief 12 adjournment. 13 ATTORNEY SADE: 14 All right. 15 CHAIR: 16 Is that acceptable to you, Mr. 17 McDonald? 18 ATTORNEY MCDONALD: 19 Yes. 20 CHAIR: 21 All right. 22 BY ATTORNEY SADE: 23 Q. Do you have Mr. Klink's Supplemental testimony 24 in front of you? 25 A. No, I don’t.
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1 ATTORNEY BRASWELL: 2 I'm sorry to interrupt, but we're 3 having a very difficult hearing Mr. Harris, and we're 4 trying to ---. 5 CHAIR: 6 Is the microphone on? Is the blue 7 light on? 8 ATTORNEY SADE: 9 Yes. 10 A. I have a copy now, yes. Thank you.
11 BY ATTORNEY SADE: 12 Q. Page two, line 19 to 21, Mr. Klink indicates 13 that Dominion will provide the credit as long as the 14 acquisition closes on December 31st, 2009; right? 15 A. On or before. 16 Q. On or before 2000 --- December 31, 2009. 17 A. Yes. 18 Q. Is this provision a problem? 19 A. Yes. Obviously, all we have before us is the 20 Hope proceeding. There is a companion proceeding in 21 Pennsylvania. This Commission has --- can only control 22 the --- whether or not Steel River should be permitted to 23 acquire Hope. They cannot control what happens in 24 Pennsylvania or whether or not, for whatever reason, 25 Dominion and Steel River delay the acquisition beyond
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1 December 31st, 2009. So having that as the condition is 2 a problem. It's a condition that we have no control 3 over. 4 Q. So conceivably, the Commission --- I forget the 5 decision due date in this case. But conceivably, the 6 Commission could rule on this matter, consider the 7 implications or import of the offer and then have events 8 occur after that that would essentially render this 9 credit, proposed credit, offer meaningless? 10 A. Yes. 11 Q. Given Dominion's past performance under other 12 agreements, do you believe that tying credits to the TSA 13 over an 18-month period is reasonable? 14 A. No, I don’t.
15 ATTORNEY MCDONALD: 16 I'm sorry. Would you repeat the verb 17 of the sentence? 18 ATTORNEY SADE: 19 Believe? 20 ATTORNEY MCDONALD: 21 Do you believe that the ---? 22 ATTORNEY SADE: 23 I can repeat the question. Maybe that 24 would be simpler. 25 BY ATTORNEY SADE:
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1 Q. Given Dominion's past performance under other 2 agreements, do you believe that tying the credit to the 3 TSA over an 18-month period is reasonable? 4 A. I think it's pretty clear from my testimony in 5 this proceeding that Dominion has a terrible track record 6 of keeping its commitments that it has made to this 7 Commission. Once burned, twice shy. I think it would be 8 very bad to tie this credit in any way, shape or form to 9 the transition services group. This Commission has no 10 enforcement or very little enforcement over the entity 11 post-closure that would be providing these services. 12 Even if you were to have a contract where under 13 the TSA provide some ways to arbitrate disputes over the 14 transition services agreement, I don’t want to be, as an 15 advocate, faced with arguing in the middle of winter 16 about Dominion's failure to respond to out-of-service 17 calls or any of the other services replaced by --- 18 provided under the transition services agreement. We've 19 already had that experience with regard to connecting 20 customers in 2004. We don’t want to repeat that again. 21 Also, you have to think about what's going to 22 happen in the future. We are going to have someone 23 employed at Dominion who will have two stacks of paper on 24 their desk. One they're getting paid for and another one 25 they're not getting paid for. The economic incentive
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1 will be they'll let that one slide. They just won't 2 process that information as quick. I think that it's 3 just a very bad idea to tie this program to the 4 transitions services agreement. 5 And finally, I think we saw demonstrated 6 yesterday, we have a buyer and seller that don’t appear 7 to agree on a lot of things. They are unlikely to agree 8 for probably the next 18 months over how the --- what the 9 transition services agreement means and how it should 10 operate. I would prefer that that TSA, if Steel River 11 acquires the company, that the TS --- they get out from 12 under the TSA as soon as possible. And obviously we need 13 some transition services, but I think they should get 14 out. They shouldn’t wait 18 months to get out from under 15 that. 16 Q. Was a matter raised yesterday, I believe, for 17 the first time in this proceeding that you care to 18 comment on? 19 A. Yes, Mr. Kenney asked a question about 20 over-recoveries and how they're treated. And it was, 21 quite frankly, my assumption when you're looking on this 22 purchase agreement that that would come out in the 23 working capital settlement at closing. I'm not sure it's 24 crystal clear on record whether that's actually what 25 happened.
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1 If you read the stock purchase agreement, it was 2 written by a lot of people who've done a lot of mergers 3 and acquisitions. And it's a somewhat thick read. I 4 think the simple root to this would be any Commission 5 order that they do approve that the acquisition to make 6 sure that --- simply state that any over-recoveries 7 should reduce the purchase price and thus be available so 8 that Steel River can pass back to customers what is owed 9 to them.
10 ATTORNEY SADE: 11 Thank you. That's all I have. Mr. 12 Harris is now available for Cross Examination. 13 CHAIR: 14 All right. Have you all decided who's 15 up? 16 ATTORNEY PATTERSON: 17 We haven’t discussed it. 18 ATTORNEY SADE: 19 I do believe, if I may, Your Honor, I 20 previously moved the admission of our exhibits. If I 21 haven’t, I will do so at this time. 22 CHAIR: 23 All right. Why don’t you all decide 24 who's doing what to whom. We're going to take about a 25 five-minute break and then we'll be back.
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1 SHORT BREAK TAKEN 2 CHAIR: 3 All right. How are we proceeding? 4 ATTORNEY MCDONALD: 5 Your Honor, my agreement with the 6 parties is that Ms. Hallinan would go first. 7 CHAIR: 8 Fair enough. 9 CROSS EXAMINATION
10 BY ATTORNEY HALLINAN: 11 Q. Mr. Harris, after hearing the testimony you 12 gave, I would ask you whether the Consumer Advocate 13 Division supports the Virginia Community Action 14 Partnership's TG request to expand the program to 15 $100,000 year. 16 A. Yes. 17 ATTORNEY HALLINAN: 18 Thank you. 19 CHAIR: 20 Mr. Patterson? 21 ATTORNEY PATTERSON: 22 I thought Mr. McDonald was going to go 23 next but I'll go if he wants me to.
24 ATTORNEY MCDONALD: 25 Either one.
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1 ATTORNEY PATTERSON: 2 Okay. 3 CROSS EXAMINATION 4 BY ATTORNEY PATTERSON: 5 Q. Good morning, Mr. Harris. 6 A. Good morning. 7 Q. As you know, I represent the Independent Oil & 8 Gas Association of West Virginia. And I do have a few 9 questions about your testimony. I would like to start 10 with the discussion yesterday by Mr. Cyrus who 11 essentially, as I heard it indicated, that a deal with 12 PPL was just a phone call away. If the New Hope 13 outsources its gas to PPL, is that something you support? 14 A. Well, just one minor thing. They are not 15 outsourcing the gas. They are outsourcing the gas 16 procurement function. And no, I do not support that. 17 Q. Are you aware of whether PPL has any unregulated 18 affiliates? 19 A. Yes, I believe they do. I believe the PPL 20 Energy Plus, that would be performing the service, is an 21 unregulated affiliate with PPL Utility or whatever the 22 corporate name is. 23 Q. And you heard yesterday that there were also 24 large gas-using entities within the PPL structure, like a 25 gas-fired electric-generating power plant. If the
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1 outsourcing occurred, how would you determine whether New 2 Hope was using its lowest cost gas for its unregulated 3 businesses or bringing its lowest cost gas to Hope? 4 A. Well, that would be very difficult. And that is 5 something I alluded to on page 20 of my testimony, in 6 that the asset manager, I call it PPL manager, but really 7 what we're talking about is asset management agreement, 8 would, as you would expect them, they're going to 9 maximize their profits. And if they are presented with a 10 transaction that will maximize their profits but be to 11 the detriment of Hope, I would not be surprised if they 12 engaged in that kind of transaction. 13 Q. In your experience, have utilities with 14 regulated and unregulated entities attempted to maximize 15 their unregulated income? 16 A. That's the name of the game. Yes. 17 Q. You talked about certain conditions and terms of 18 where offices and employees would be located. Can you 19 tell us why you recommended that New Hope be located in 20 West Virginia? 21 A. Well, I think that is consistent with the 22 original 1984 agreement when Hope was separated from the 23 old Consolidated Gas Supply to form what later became 24 Consolidated Transmission (sic) and Hope Gas, a separate 25 entity. Hope Gas used to be a division of Consolidated
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1 Gas Supply. And the agreement was that the headquarters 2 would remain in Clarksburg. And as I say in my 3 testimony, that's one of the agreements that Dominion 4 failed to offer. 5 Q. I want to turn now to something that Mr. Cyrus 6 said in his testimony. He indicated that he was working 7 with the Consumer Advocate with respect to hedging a gas 8 acquisition in that testimony. Can you tell us more 9 about what that's about? 10 A. Well, ---.
11 ATTORNEY FEINBERG: 12 Objection for just a minute. I assume 13 the testimony of Mr. Cyrus will speak for itself as 14 opposed to Mr. Patterson's characterization of it. And 15 the only reason I question that is because I remember 16 hedging and for the moment don’t remember gas 17 acquisition. But I'm confident Mr. Harris can straighten 18 it out and answer it however he wants to. I just want to 19 note for the record that it may not say quite that. 20 CHAIR: 21 Go ahead. 22 A. Well, ---. 23 CHAIR: 24 With that objection noted for the 25 record.
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1 A. I have to be careful here because we have had 2 discussions about hedging, and it has been, to a great 3 degree, in the context of settlement discussions. And I 4 don’t want to venture into those. Suffice to say, the 5 Consumer Advocate Division has a well-established record 6 of recommending that the gas utilities engage in hedging 7 and particularly at this time engage in as much hedging 8 as possible at these prices.
9 BY ATTORNEY PATTERSON: 10 Q. Were your discussions limited to hedging? 11 A. No. Obviously during the course of settlement 12 discussions we discussed the whole parameter of issues in 13 both of these cases. 14 Q. Well, recognizing that you do want to keep 15 settlement discussions confidential but however Mr. Cyrus 16 put that in his testimony. Were there issues other than 17 hedging that were discussed? 18 CHAIR: 19 Discussed where? 20 ATTORNEY PATTERSON: 21 Between the Consumer Advocate and Mr. 22 Cyrus. 23 CHAIR: 24 During settlement discussions? 25 ATTORNEY PATTERSON:
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1 No, not with respect to settlement 2 discussions. Specifically with respect to gas 3 acquisition or transportation or anything like that. 4 A. I don’t recall anything outside of what has been 5 filed or what's in --- was in settlement discussions. 6 BY ATTORNEY PATTERSON: 7 Q. Do you consider yourself an advocate for 8 residential customers? 9 A. Yes. 10 Q. So you're not an advocate for business interest 11 at all? 12 A. Well, the policy, the statutes and the rules are 13 a little bit murky on that. Our policy has been since 14 1982 to represent all customers where there is not a 15 conflict. And where there is a conflict between customer 16 classes, we represent residential customers.
17 ATTORNEY PATTERSON: 18 That's all I have at this time. 19 CHAIR: 20 Mr. McDonald? 21 ATTORNEY MCDONALD: 22 Thank you, Your Honor. 23 CROSS EXAMINATION
24 BY ATTORNEY MCDONALD: 25 Q. Good morning, Mr. Harris.
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1 A. Good morning. 2 Q. Let's just start off with your testimony in the 3 rate case and focus first on your class cost for service 4 study. You note on page 14, line seven that Hope's class 5 cost for service study divided distribution mains into 6 high and low pressure categories. 7 A. That's correct. 8 Q. And you did not? 9 A. That's correct. 10 Q. Correct? You acknowledge, do you not, that in 11 the Commission's class cost for service study in Hope's 12 last litigated case, 1993, the Commission divided 13 distribution mains into high and low pressure categories; 14 correct? 15 A. That's correct. 16 Q. You acknowledge that, as noted in Mr. 17 Gregorini's Rebuttal testimony that Dominion Hope's 1995, 18 1998, 2001 and 2005 base rate cases, all of which were 19 resolved through settlement, also included class cost for 20 service studies reflecting separation of high and low 21 pressure mains? 22 A. Their filings did, yes. This has been an issue 23 between CAD and Hope for many years. So that's the way 24 you filed your cases. 25 Q. Do you agree that larger volume customers
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1 require higher line pressures than smaller volume 2 customers to meet usage requirements? 3 A. Are you talking about the customer who is tapped 4 off of a high pressure volume? Because you would 5 certainly have a situation where we need to have a high 6 pressure line in order to have sufficient pressure to 7 meet the needs of the low volume customers who were far 8 from the tap on the transmission line, for example. So I 9 just want to be clear on that. 10 Q. Well, I'm not clear. The question was do you 11 agree that larger volume customers, large volume 12 customers, require higher line pressures that smaller 13 volume customers in order to meet their requirements? 14 A. I'll accept that, yes. 15 Q. We can agree that gas flows from high pressure 16 to low pressure systems? 17 A. Not all the time, no. 18 Q. Sometimes it flows from a low pressure system to 19 a high pressure system? 20 A. No. Hope has something like 300-plus 21 distribution lines. Not all of those, as I point out in 22 my testimony, are necessarily containing high --- any 23 kind of pressure facilities. We have taps spread out all 24 over the state. And Hope has a global distribution 25 network serving customers all over the state. It's not
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1 one integrated system that was built in a logical --- 2 what appears now, to be a logical corridor going from 3 transmission of the high pressure distribution to low 4 pressure distribution. 5 Q. So you dispute then, Mr. Harris, that gas flows 6 from a high pressure to a low pressure system? 7 A. It does in those areas where the system's been 8 designed that way, yes. 9 Q. How can gas flow from low pressure to high 10 pressure? 11 A. I didn’t say it flowed from low pressure to high 12 pressure. I said there were many areas where there 13 aren’t high pressures facilities. 14 Q. Yes, I understand that. But I thought you would 15 not agree that gas flows from high pressure to low 16 pressure systems. 17 A. I think we're saying the same thing, Mr. 18 McDonald. I think in a distribution model like 19 Clarksburg that would be true, generally speaking. There 20 might be --- 21 Q. What would be ---? 22 A. --- areas of Clarksburg that aren’t served that 23 way. But an area like Huntington, West Virginia, that 24 would not be true. 25 Q. What would not be true?
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1 A. You wouldn’t have any high pressure facilities 2 so gas would not flow from high to low pressure. 3 Q. Because there's no high pressure system? 4 A. Yes. 5 Q. Is it possible for a large volume customer that 6 requires higher pressures ---? 7 A. I'm sorry? 8 Q. Would it be possible for a large volume customer 9 that requires higher pressures to have its gas move 10 through a low pressure system? 11 A. Not without some compression at the end of the 12 low pressure system. 13 Q. You testified on page 14, line 21 that the 14 company's allocation factors are not based on actual 15 usage during the test year; correct? 16 A. Yes. 17 Q. Your peak day allocations are not based on 18 actual usage during the test year either, are they? 19 A. Well, what I did was I used the actual peak day 20 study from 2001 and there's basically a simple ratio with 21 a difference in throughput by class. And so I did use 22 the test year's throughput in that calculation. But I'll 23 grant you it was not a study for the test year. 24 Q. Mr. Gregorini testified in his Rebuttal 25 testimony that you used peak day allocation factors that
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1 reflect the actual three-day consecutive peak from 2 January 1994. Do you disagree with his observation? 3 A. Yes, slightly. As I stated, what I did was I 4 went back to the last available actual peak day study and 5 compared that to the throughput at that time and then 6 compared that with throughput in the test year. And so 7 the actual allocation factors that result from that are 8 not --- are based upon that older peak day study but 9 they're not from that peak day study. 10 Q. The 2001 study --- 11 A. Yes. 12 Q. --- you mentioned? And can we agree that that 13 study used peak day factors reflecting the 1994 three-day 14 consecutive peak day ---? 15 A. That's what Mr. Gregorini says in his testimony 16 and I'll accept that. 17 Q. Do you agree with Mr. Gregorini's Rebuttal that 18 CAD's allocation of transmission plant and related costs 19 business debt which is directly assigned to the LCIDS, 20 that's direct service class, costs associated with 21 specific transmission main lines and rights-of-way that 22 are solely dedicated to serving the LCIDS class? 23 A. Yes, Mr. Gregorini's absolutely right on that, 24 yeah. That has a tremendous impact of the results of the 25 study. Hope has very little transmission plan. Quite
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1 frankly, just didn’t do it because my Excel spreadsheet 2 would not --- would tend to move --- would not move 3 things around, and I didn’t have time to make sure that 4 it didn’t blow up the mark. So I recognized that at the 5 time I was doing this, that that was a conceptual flaw in 6 what I did. But as I say, I just didn’t do that. 7 Q. Your Direct testimony, page six, line 18, you 8 state that the main purchase in the class cost of service 9 study is cost causation; correct? 10 A. Yes. 11 Q. And you define cost causation as the underlying 12 factors which impact the company's investment decisions; 13 correct? 14 A. Yes. 15 Q. When a company, such as Hope, designs and builds 16 a pipeline system and incurs costs to do so, would it be 17 more appropriate to design the pipeline system to meet an 18 actual recent three-day consecutive peak or maximum flow 19 condition? 20 A. Well, I think you would probably design for an 21 anticipated peak. But that doesn’t necessarily mean that 22 that's how you should allocate those costs because when 23 you have a test year, and you have a test year concept, 24 and the customers use whatever gas they use during the 25 test year, and therefore their overage cost
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1 responsibility is based upon their usage. The design of 2 Hope's plan 50 years ago, you can't go back to that you 3 use that as a basis for allocating costs. 4 Q. Are you saying you should allocate costs based 5 on recent weather? 6 A. I mean, you have to use test year factors 7 whether or not they're adjusted for weather normalization 8 is another complete issue. But I don’t --- I think we 9 would be --- Hope used to be a 30-plus million decatherm 10 throughput company. They're now 22 million. You simply 11 cannot allocate those costs based upon that old 30 12 million number, which is what the system was designed 13 for. Those customers aren't here. 14 Q. A&G cost, the allocation of administration and 15 general cost is always an issue in these cases, isn’t it? 16 A. It is the most significant --- has the most 17 significant impact on all the class cost of service 18 studies presented. 19 Q. You noted on page 16, line four that Hope's 20 class cost of service study allocates one half of one 21 percent of A&G costs to the LCIDS class. Do you know how 22 many LCIDS customers there are? 23 A. I don’t know if there's --- there are 25 meters. 24 Some of those customers may have more than one meter, so 25 it's less than 25.
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1 Q. My information is that there are 11. Would that 2 --- does that sound about right to you? 3 A. I would say, yeah. 4 Q. Do you agree with Mr. Gregorini's Rebuttal 5 testimony that the LCI and LCIDS classes comprise only 55 6 customers? 7 A. Yes. But they compromise 40 percent of the 8 throughput on the system. I mean, as far as I know of, 9 no Commission has ever allocated A&G cost. That I've 10 ever seen in --- either here or in reviewing class cost 11 of service studies in both gas and electric utilities in 12 other states, has ever allocated A&G on one of their 13 customers. 14 Q. And Hope doesn’t, does it? 15 A. No. They don’t do throughput either. 16 Q. Well, Hope's allocation factors for A&G expenses 17 allocates 17 percent of A&G expenses on the basis of 18 throughput, doesn’t it? 19 A. No, that's incorrect. Mr. Gregorini's testimony 20 on that is extremely deceiving. He says that he 21 allocates certain distribution plant costs on throughput 22 when, in fact, he does not. He --- which you can see 23 very simply from looking at their columns of those items 24 that he mentions. There is zero in those columns for the 25 LCIDS customers. Mr. Gregorini is using the definition
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1 of throughput that is not used in the natural gas 2 industry. He did not use throughput, period. 3 Q. Okay. Then we'll take a look at that. Consumer 4 Advocate is fairly well-committed to opposing the bare 5 steel rider proposal in this case; is it not? 6 A. That's correct. 7 Q. Its position is based on more rate-making theory 8 than engineering or safety or jobs; is that true to say? 9 A. Well, I'm not sure those are necessarily at 10 issue, but I did not address those. 11 Q. Well, you heard what Mr. Kinney's testimony ---? 12 A. I did. 13 Q. He addressed those? 14 A. I did. 15 Q. My question is that your objection is based upon 16 rate-making theory and not on the factors that Mr. Kinney 17 observed? 18 A. Right. And all I'm pointing out is I'm not sure 19 those factors apply. That's all. 20 Q. Okay. I take it that there are no circumstances 21 under which the CAD would support a bare steel --- 22 accelerated bare steel replacement program, or are there 23 such circumstances? 24 A. No, I don’t believe so. As I pointed out in my 25 testimony, regulatory lag is a good thing. It sounds bad
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1 but it's a good rate-making practice. It is one of the 2 --- perhaps the only tool the Commission has to enforce 3 some discipline on plant investment decisions. And as 4 I'm seeing in this case, it is highly impractical to 5 expect the Staff or the CAD to go back and redo every 6 work order, every investment that’s in the plant addition 7 made by the company since its last rate case. We can't 8 do that. 9 The tool, the regulatory tool, that was used to 10 enforce discipline is regulatory lag. The fact that the 11 company will not receive recovery of its investment for 12 some time period is what keeps the company honest, if you 13 will, for a lack of better way to say it. They are going 14 to have an incentive to not updating --- not over-invest 15 in the facility. 16 Q. In fact, if there is regulatory lag, there's an 17 incentive for investors not to invest at all, isn’t 18 there? 19 A. No, I wouldn’t say that, no. 20 Q. Why would an investor invest in an investment 21 for which he cannot earn a return for some extended 22 period of time? 23 A. Because the investor will run a return. And 24 that return is pursuant to Hope in Bluefield is the 25 Commission's required to make rates that allow them the
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1 opportunity to run the return of similarly situated 2 coverage. 3 Q. Well, that sounds good. But if an investor 4 makes an investment in Hope of $5 million today and earns 5 no return of or on that investment for three years, 6 that's not a very attractive investment to him, is it? 7 A. Well, obviously it is. People do invest in 8 public utilities. And regulatory lag is a feature of 9 public utility regulation, and has been for a hundred 10 years. 11 Q. Can we agree, Mr. Harris, that Dominion's 12 decision to consolidate services among its affiliated 13 companies is consistent with similar structures adopted 14 by other utilities? 15 A. Yes. 16 Q. Page seven, line 20, you complain that the ---. 17 A. You're in my acquisition section? 18 Q. Page seven, line 20 of the acquisition. 19 A. Yes. Thank you. 20 Q. Dominion has stripped Hope of its executive 21 management team. I take it that the CAD is prepared to 22 recommend rates for Hope that support an executive branch 23 of the team in Clarksburg; correct? 24 A. Yes, but as I said in my testimony, we already 25 are supportive in the executive management team. It's
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1 just that it is spread throughout the Dominion 2 organization. There's still annual cost. It's just ---. 3 Q. Those executives for whom the cost are included 4 in rates don’t spend all of their time on Hope's 5 business, do they? 6 A. No, they do not. 7 Q. That's significant, isn’t it? 8 A. Well, ---. 9 Q. Would it be more expensive to have a management 10 team that has spent all its time on Hope's business than 11 part of their time on Hope's business? 12 A. No. If Dominion has three people who spend a 13 third of their time performing the function that one 14 person can do, obviously then that is the same. 15 Q. Do you have evidence that Hope's management 16 structure is inefficient or not beneficial to ratepayers? 17 A. Oh, yes. As I stated very clearly in my 18 testimony, many of the problems that have happened under 19 Dominion's watch, I feel very certain would not have 20 happened had Hope had senior management looking out only 21 for Hope in West Virginia. I am very certain of that. 22 Q. Is that your evidence? 23 A. Pardon? 24 Q. Is that your evidence? 25 A. No. The evidence are the cases are cited in the
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1 failure to connect customers when we went for almost a 2 year where we had up to 70 complaints before this 3 Commission of customers who had requested service that 4 would not --- could not get service because Dominion 5 failed to live up to the 1984 agreement. There is a 6 confidential matter, as you know, about rate making, 7 about the charges of Dominion transmission rates that was 8 --- also occurred under Dominion's watch. There's a 9 third one that doesn’t come to my mind right now, but I 10 ---. 11 Q. You accuse Hope of moving its headquarters out 12 of Clarksburg? 13 A. Yes, yes. There is no Hope headquarters in 14 Clarksburg. 15 Q. How could you say that, Mr. Harris? There is a 16 Hope headquarters in Clarksburg and has been since 1984. 17 A. In name only, sir. I've worked on both cases 18 since 1982. I'm very familiar with Hope, how it operates 19 and the management teams it's had over the years. And 20 you can't sit there and tell me that the --- what is 21 there now is anything like what used to be at Hope when 22 Hope had a headquarters in Clarksburg. 23 Q. I can tell you that Hope conducts business 24 meetings in Clarksburg. It houses many of --- both field 25 and administrative employees in Clarksburg and has since
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1 1984. 2 A. Hope does not have a --- 3 Q. Jim Staten (phonetic) had an office in 4 Clarksburg. 5 A. --- does not have a president, does not have a 6 treasurer, does not have an accountant, does not have a 7 gas procurement officer, does not have a transportation 8 storage management officer. The list is extensive.
9 ATTORNEY MCDONALD: 10 Good place to stop, Mr. Chairman. 11 That’s all the questions I have at this time. 12 CHAIR: 13 Mr. Feinberg? 14 ATTORNEY FEINBERG: 15 Thank you, Your Honor. 16 CROSS EXAMINATION 17 BY ATTORNEY FEINBERG: 18 Q. Good morning, Mr. Harris. 19 A. Good morning. 20 Q. I think I'll start with your sale case 21 testimony. 22 A. Okay. 23 Q. How long have you been at the Consumer Advocate 24 Division? 25 A. Well, except for a two-year hiatus in 19 --- in
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1 the late 1980s, I've been there since 1982. 2 Q. So clearly, you are familiar with, what I call, 3 CNG-Hope, --- 4 A. Yes. 5 Q. --- posthumous, I think from what I just heard, 6 when it was just a division and then later when it was a 7 corporation of CNG. 8 A. Yes. 9 Q. Time escapes me, of course. Were you around 10 when Hope was just an independent entity of its own? I 11 don’t know when that was. That's why I'm asking. 12 A. Well, the 1984 case was when Hope was split off 13 as --- was formerly a division and then became its own 14 entity. 15 Q. Okay. 16 A. So yes. 17 Q. Looking at all of that, and obviously including 18 Dominion Hope, which model is it that you like the most? 19 A. Which model? 20 Q. Yeah. The independent Hope? 21 A. Well, in the best of both worlds, Mr. Feinberg, 22 I'd have to say I would prefer that all the utilities not 23 have affiliates that are in other businesses. I don’t 24 think that works to customers' advantage. So 25 consolidating will present its own problems. As long as
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1 you have an affiliate that’s occurred under consolidated 2 that owns production and transmission and other aspects, 3 you are always going to have the potential for delayed 4 abuse. 5 Q. Would you agree generally that Steel River most 6 looks like the independent Hope? 7 A. That is, in my --- if you take a long view of 8 this, I think that is probably one of the principal 9 advantages to Steel River's acquisition. 10 Q. You're willing to concede that’s a benefit to 11 --- 12 A. Yes. 13 Q. --- the ratepayers? 14 A. Yes. 15 Q. You know that Mr. Smith, of course, who did a 16 lot on this case, defers, as I call it, to you on the 17 policy decisions; right? 18 A. I would hope he would, yes. 19 Q. I'm sure you do. And so I sort of look at your 20 testimony, CAD Number Two and Number One, obviously, in a 21 public version, as CAD's policy in this case and its 22 decision making, so to speak, about the appropriateness 23 of the sale, whether it's in the public interest, et 24 cetera. Even though obviously Mr. Smith offers lots of 25 positions, it's your testimony that tells us what the CAD
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1 position is? 2 A. That's correct. 3 Q. And again, generally --- and I know there's lots 4 of testimony in there that sort of slides away from these 5 ideas. But you list some harms and then you list ten 6 conditions that, I can characterize them, and correct me 7 if I'm wrong, that without which --- the doing of those 8 conditions without which the performance of those 9 conditions, it's your opinion that the transaction is not 10 in the public interest? 11 A. That's correct. 12 Q. Why don’t we go through them a little bit then? 13 And I think that you need Mr. Kinney's Rebuttal 14 testimony, if you've got it up there by any chance. 15 A. No, I do not. 16 Q. It's the one with the list. Maybe your Counsel 17 can give it to you or maybe I can come up with one. It's 18 ---.
19 CHAIR: 20 Hold on. We'll get it. 21 ATTORNEY FEINBERG: 22 Pittsburgh --- it's P-H-G. 23 ATTORNEY SADE: 24 Are we talking about the --- that would 25 be great if you have an extra version.
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1 ATTORNEY FEINBERG: 2 Your Honor, it's P-H-G-C-P-K, dash ---. 3 BY ATTORNEY FEINBERG: 4 Q. Got it, Mr. Harris? 5 A. I do. Thank you. 6 Q. In the exhibits in the back, I think CPK-8 is 7 the listed conditions. 8 A. Yes. 9 Q. After watching everybody go through these, I 10 seriously ---
11 CHAIR: 12 It's better to be done by questions. 13 BY ATTORNEY FEINBERG: 14 Q. --- about not doing this, but I think I can I 15 can make them ---. All right. So I'm going to be 16 looking at the conditions and I'm going to be looking at 17 Mr. Kinney's conditions. 18 A. Okay. 19 Q. Your conditions ---. 20 CHAIR: 21 CAD's conditions begin on page four; is 22 that correct? Is that what you're --- 23 ATTORNEY FEINBERG: 24 Yes, Your Honor. 25 CHAIR:
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1 --- saying? All right. 2 BY ATTORNEY FEINBERG: 3 Q. Yeah, the very first one is page four, line 12, 4 and then from thereafter. Mr. Harris, you correct me if 5 I'm wrong periodically, but number --- condition number 6 one of yours is exclude the acquisition premium; is that 7 right? 8 A. Yes. 9 Q. And later --- and I don’t want you to look it up 10 because you probably know. I think Mr. Smith throws in 11 and it should be computed in accordance with account 114 12 of the U.S. System of Accounts? 13 A. That's correct. 14 Q. United System of Accounts. Uniform System of 15 Accounts, sorry. Right? 16 A. Yes. 17 Q. Isn't that Mr. Kinney's conditions number one 18 and number two, in your opinion? One, talking about 19 acquisition premium and number two, talking about the 20 Uniform System. Well, actually number one talks about 21 Uniform System of Accounts. 22 A. Yes. 23 Q. And number two talks about permanently excluding 24 any acquisition premium from that? 25 A. I think Mr. Kinney's conditions one and two
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1 comply with that condition of the CAD. 2 Q. The next two you talk about are transaction 3 costs being excluded permanently and transition costs 4 being excluded permanently. And that's your conditions 5 two and three? 6 A. Yes. 7 Q. Now, for the moment, and I promise you I'll come 8 back to them, let's exclude the debate over customer care 9 or system costs and financing costs; okay? 10 A. Okay. 11 Q. And I promise you I'll come back. Would you 12 agree with me that Mr. Kinney's third condition says 13 transaction and transition costs to complete the 14 transaction will not be claimed in any rate proceeding? 15 A. Yes, but with an exclusion, which as you know, 16 are the major components of the transaction and 17 transition costs. 18 Q. Okay. And I'm coming back. In addition, Mr. 19 Kinney's number six deals with never seeking deferral as 20 a regulator asset of any transaction or transition cost. 21 And I think that's your condition four; right? 22 A. Yes. 23 Q. So now let's digress back into customer care and 24 the system costs and the financing. And clearly, Steel 25 River and CAD and Staff have a dispute over those two
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1 numbers; right? 2 A. Yes. 3 Q. Based on what you know and the testimony of Mr. 4 Gregorini and Mr. Cyrus, the customer care costs and 5 system costs are essentially computers in the billing 6 system; right? 7 A. That's my understanding, yes. 8 Q. See if you agree with these points. Mr. Cyrus 9 testified that there were a bunch of ancient hardware and 10 software related to that. Mr. Gregorini acknowledged 11 that some of the software was 10 to 15 years old or 12 older, including the high performance billing system, 13 which is the major billing methodology of Hope. Mr. 14 Gregorini said --- or a number of people have conceded 15 that they're not serviced anymore by the manufacturer and 16 they're probably totally depreciated. Do you agree with 17 all of that? 18 A. I have no basis to dispute this. I understand 19 that Mr. Cyrus and Mr. Gregorini said these things. 20 Q. And to be fair, on Staff Cross Examination, Mr. 21 Gregorini also said in connection with this dispute about 22 having taking them out of rate base and wanting to put 23 them back in, that they were still able to be used; 24 right? 25 A. Yes.
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1 Q. CAD takes the position that what we've just been 2 discussing, the replacement of customer --- I'm just 3 going to call them customer care system. The customer 4 care system would be presumably a transition cost or a 5 transaction cost; is that right? 6 A. I think transition cost, yes. 7 Q. If Steel River decided not to make a purchase of 8 this customer care system the customer care system right 9 now and waited and used the old system, and a year from 10 now or 18 months after having gone through working with 11 an ancient system, went out and made a purchase of a 12 customer care system, and shortly thereafter or around 13 the same time filed rate case, for sure having purchased 14 in the test year but undoubtedly being a known measurable 15 change even after the test year, you wouldn’t be able to 16 call it a transaction --- a transition cost, would you? 17 Because it would be looked at just like any other capital 18 expenditure or O&M cost in a rate case? 19 A. That's correct. But what's crucial to your 20 hypothetical is that we are well beyond the termination 21 of the transition services group, because even though we 22 refer to the plant has it's been taken out and put back 23 in, I'm not sure all of it is captured by those things. 24 There were also items in the transition services 25 agreement.
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1 And part of this is we want to avoid double 2 counting, like original costs that would be incurred on 3 Hope's books related to these factors. We don’t want to 4 add new costs for the same function. But assuming all of 5 that has transpired and they went out and purchased the 6 main expenditures for the, what you call, customer care 7 system, then it would be treated like any other expense 8 or investment in a rate case. 9 Q. And presumably based on my hypothetical, doing 10 this in 12 to 18 months or whatever and then putting it 11 into the next rate case, which will project out, you 12 know, another year thereafter, so we're out two and a 13 half to three years. As you disagreed, that would 14 undoubtedly be considered a use and useful piece of 15 equipment and it would either be capitalized or be an 16 expense, depending on where things fell? 17 A. Right. And they would be determined by the 18 facts at the time. 19 Q. Okay. Nothing in discussion of the customer 20 care system suggests that they're in this rate case, does 21 it? 22 A. Well, the --- certainly the costs incurred by 23 Hope under the current system are, yes. 24 Q. But a new customer care system? 25 A. No, you're right.
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1 Q. And when it will first be seen by ratepayers and 2 paid for is after the next rate case, presumably a Steel 3 River Hope rate case? 4 A. That's correct. 5 Q. Which one could project would be two or three 6 years out and the exact same rate case that we just used 7 in our hypothetical; right? 8 A. Yes. 9 Q. So whether the customer care purchase is today, 10 system is today, figuratively today, or whether it is a 11 couple of years out, the ratepayer is going to see the 12 cost in exactly the same time; right? 13 A. Yes. With, again, the caveat, it depends upon 14 the timing of it because we want to avoid double 15 counting. 16 Q. Double counting on the TSA? 17 A. Yes. 18 Q. I'll try to come back to that. In the meantime, 19 however, under the CAD's approach, Steel River functions 20 for 18 months or so, 24 months, whatever it would be, 21 with an antiquated customer care system. Even if it 22 could be used, it's still antiquated. Yet the Steel 23 River approach puts a brand new, up-to-date computer 24 system for better use by the company and presumably 25 better use for the ratepayers because of its efficiency,
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1 et cetera; right? 2 A. Yes. 3 Q. Financing cost. That's the second component of 4 the CAD and the Staff. And I know you're not speaking 5 for Staff. But on the --- that's a transaction cost not 6 otherwise and therefore it should not be allowed? 7 A. Correct. 8 Q. In essence, what you suggest is that the 9 financing cost of Steel River's acquisition of long term 10 debt shouldn’t be paid for by ratepayers? 11 A. That's correct. 12 Q. Would you agree with me that nothing prevents 13 Dominion Hope from getting new debt, I'm talking about 14 Dominion Hope now, anytime they want to and seeking the 15 Commission's approval in the next rate case --- 16 A. They can. Sure they can do that. 17 Q. --- for those inancing cost ---? 18 A. Yes. 19 Q. So for instance, if you look on the document, by 20 happenstance, that Mr. McDonald passed out this morning 21 to Mr. Kaz, the second page of which listed all the Hope 22 debt, the very last one listed was a $40 million note 23 that matures in 2011. And of course, everybody has that 24 one because that's the one that you and --- the CAD and 25 Staff has re-priced; right?
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1 A. I'll take your word for it. I don’t recall what 2 the maturity is. 3 Q. One would guess that Dominion Hope would be 4 refinancing that 2011 maturity at that time; right? 5 A. Probably, yes. 6 Q. And that note or bond would end up in the next 7 rate case, which would be right around the same time if 8 we followed the normal three-year pattern that Dominion 9 Hope has done recently, three to four, and the Commission 10 would look at the financing cost and determine whether it 11 was a reasonable expense for the ratepayers? 12 A. Right, but that's not what's at issue here. We 13 have the Steel River replacing all of those and thus 14 higher financing cost. 15 Q. Well, $70 million versus $40 million; right? 16 A. Yes. 17 Q. I mean, just so the number's in the record. I 18 understand your point. Now, just like the customer care 19 system, the financing cost of the acquisition of 20 long-term debt will not go into rates in this rate case; 21 right? 22 A. That's correct. 23 Q. And so it'll be the next rate case, again, --- 24 A. Yes. 25 Q. --- when they do it?
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1 A. Yes. 2 Q. And again, we're back to exactly the same time 3 period, the same as the customer care ---? 4 A. A little bit different. I don’t think you can 5 say Hope's current debt is old and antiquated. 6 Q. Same time period, same rate case? 7 A. Yes. 8 Q. So just to keep our comparison going --- and it 9 actually won't go much longer on CPK-8, the Kinney 10 conditions. Number five says cost to provide service 11 including system costs to help customers may be 12 submitted, may be submitted, as appropriate in future 13 rate proceedings. So they're not even seeking anything 14 today, they're saying it may be submitted in future rate 15 proceedings; right? 16 A. Yes. 17 Q. And number four has the same basic language 18 about cost incurred to issue debt? 19 A. Yes. Will be in --- that's not really a 20 Commission --- a condition. It would be something we 21 can't prevent you from making a filing with the 22 Commission. 23 Q. So except for the fact that obviously having 24 Staff disagree on --- with Steel River, the process is 25 essentially the same; right?
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1 A. Yes. 2 Q. And it would seem that at this moment in time 3 the decision about that customer care system and its 4 appropriateness and financing cost and its 5 appropriateness to be considered in the next rate case is 6 an issue that's going to go to the Commission? 7 A. I don’t understand your question. 8 Q. Well, I guess what I'm saying is while Mr. 9 Kinney's position, as expressed in number four and number 10 five, are different from yours, I'm going to refer to it 11 as his counterproposal, which I think is what he called 12 it on the stand yesterday in an answer to the Chairman, 13 and while there may be an issue between us, neither of us 14 are going to decide it at this point in time and that’s 15 going to be an issue decided in this case; right? 16 A. Yes. Yeah. 17 Q. Okay. 18 A. The Commission will have to consider the 19 arguments on both sides. 20 Q. Right. And so I'm trying to --- one of the 21 things I'm doing here is --- for a little bit longer is 22 showing that there is an agreement in the sense that 23 there's an easy way to look at five conditions, as it 24 will turn out seemingly, and with the Commission's help 25 in a little bit on one so far, one condition, those
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1 issues could be resolved between us? 2 A. I think I agree with that statement. 3 CHAIR: 4 Well, when you said will go to the 5 Commission in the case, you meant a future rate case? I 6 mean, we'll make the decision here but the merits and the 7 rate impact will be decided in the next rate case? 8 ATTORNEY FEINBERG: 9 Yes, Your Honor. And that's absolutely 10 right. That same rate case or the next rate case will be 11 where the Commission makes a decision as to what's 12 appropriate and what isn’t appropriate. To make clear, I 13 do believe what's being said is we would be told in this 14 order that they were not transaction and transition 15 costs, obviously Mr. Harris would hope for otherwise, so 16 that we would have guidance, particularly on the customer 17 care thing. So I mean, I think that's the way our 18 condition reads. Don’t prohibit us from saying --- don’t 19 prohibit us from ever coming to you in a rate case and 20 seeking recovery of those. I don’t think it --- well, 21 I'm testifying, so I'll quit.
22 ATTORNEY SADE: 23 Yeah, Your Honor. And that was going 24 to be the subject of an objection, which I'm making now, 25 that a lot of this sounded like Mr. Feinberg's opinion of
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1 how this case was going to proceed. And I would expect 2 you to strike his testimony. But I would like to note 3 that it's simply Mr. Feinberg's view of the world. 4 CHAIR: 5 I understand. 6 A. And with that understanding, I'll be very brief. 7 I don’t think the Commission should defer --- obviously 8 these decisions in the next rate case will be what they 9 will be. But I wouldn't kick the can down the road, if 10 you will, on these issues. These are issues that the --- 11 and the potential impact on customers, the Commission has 12 to decide in this case.
13 BY ATTORNEY FEINBERG: 14 Q. I don’t think our conditions expressed say 15 anything other than that. 16 A. Okay. Then we're fine. 17 Q. Now, maybe Mr. Kinney's conditions need some 18 word snipping to make them clearer. So I'm not taking 19 into account any of these questions, but there may be 20 some word snipping that needs to go on. But I'm trying, 21 you know, to see if we aren’t in agreement on a lot of 22 things. 23 ATTORNEY FEINBERG: 24 Now, if I can just have a minute, Your 25 Honor.
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1 COUNSEL REVIEWS DOCUMENTS 2 BY ATTORNEY FEINBERG: 3 Q. I promised to go back to your double counting 4 comment. That's something that you --- I think is in 5 your testimony periodically about the TSA? 6 A. Yes. 7 Q. And the fear that the ratepayer will double pay, 8 they'll pay Steel River for doing something that's 9 already in the rates for Dominion Hope right now? 10 A. Yes. 11 Q. You've read, I guess, Mr. Cyrus' and Mr. King's 12 Rebuttals. I think it was Mr. Cyrus' that respond to 13 your point about double counting and say it's not double 14 counting? 15 A. I read that, yes. I don’t recall agreeing --- I 16 can't recall exactly what he said. I recall not agreeing 17 with what he said. 18 Q. And I think what conceptually goes on, and see 19 if you agree, is for some period of time while the TSA is 20 operating, Dominion Hope will be performing certain 21 functions. And those functions are presumably already in 22 rates? 23 A. Yes. 24 Q. And if Steel River made a purchase of this 25 customer care system and was doing the billing, the
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1 customer care portion of it, then there wouldn’t be a TSA 2 --- there wouldn’t be Dominion performing it, it would be 3 Steel River performing it, and that was they were being 4 paid rates at that time that would be covering with their 5 performance, it wouldn’t be a second set of rates? 6 A. Well, only --- that's only true if you exclude 7 all the cost from the --- per books. You'd have to make 8 an adjustment to pull out everything that Dominion is 9 doing and substitute Steel River's. 10 Q. I mean, at any given point in time, only one 11 person is going to be performing a function. And if it's 12 Dominion being paid under the TSA and if the TSA is ended 13 or that piece drops out of the TSA, then it'll be Steel 14 River being paid and they won't seek to collect until the 15 TSA is completed; right? 16 A. Well, it depends upon the test year in the next 17 rate case. If the test year includes all of those TSA 18 costs, it will be in the per books amount. 19 Q. Well, and ---. 20 A. And make a going level adjustment to remove all 21 of the Dominion costs and substitute. 22 Q. Sure. 23 A. And then you --- of course, you're going to have 24 the problem --- without any operating history of Steel 25 River, any projected O&M expense based upon that would be
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1 projected. So you're going to have a problem. 2 Q. But it's ---. 3 A. The pure way to do it is Steel River does its 4 system --- does whatever it's going to do, operates for a 5 year so that the test year has only Steel River costs and 6 then you can go forward. That's the cleanest way to do 7 it. 8 Q. I'll put it there on that double counting issue. 9 Your next condition is number five. And how about 10 looking at Mr. Kinney's number seven and see if they're 11 not pretty close? Again, understanding there may need to 12 be some word snipping. 13 A. They're close. And this comes from my own 14 understanding of Mr. Smith's, nonrecourse financing I 15 believe is a term of art. I don’t see that in Mr. 16 Kinney's condition. 17 Q. It's apparently the same kind of functions that 18 we're talking about but the words aren’t just precisely 19 the same yet? Recognizing Mr. Smith's condition. 20 A. It is beyond my understanding of all the nuances 21 of what nonrecourse financing is. 22 Q. Okay. So now, looking at from then on in your 23 conditions, six through ten, just too quickly get on the 24 record what they are. Six is there can be no financing 25 cost increases and Steel River has to be responsible for
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1 financing cost increases over the next five years? 2 A. That's correct. 3 Q. Later on in group ten is five-year base rate 4 moratorium? 5 A. Yes. 6 Q. There are --- there's, what has been called in 7 the record a number of times, Mr. Smith's suggestion of a 8 Hope harmless rate adjustment that represents an offset 9 to the ADITC loss arising out of the 338? 10 A. Yes. 11 Q. And then there are, as I always call them, 12 nonfinancial issues number nine and ten, nine being don’t 13 outsource and ten being put more people in, I'm not 14 making light of this, put more people in Clarksburg to 15 run Hope? 16 A. That's right, yes. 17 Q. You know, there's been a lot of discussion here 18 about outsourcing. I certainly understand your position 19 as condition number nine. By the way, I'm not going to 20 refer to Mr. Kinney's conditions anymore, since we 21 clearly don’t have agreement on those five points. In 22 your Cross Examination question by Mr. Patterson, you 23 used the word outsourcing, but you didn’t confine it to 24 the interstate gas --- or to the interstate gas system. 25 That's what the outsourcing was going to be; right,
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1 interstate ---? 2 A. No. 3 Q. It is not ---? 4 A. There was nothing in the letter of intent that 5 limits ---. 6 ATTORNEY SADE: 7 Careful. There are people in the room 8 ---.
9 BY ATTORNEY FEINBERG: 10 Q. Yes, be generic on that, I guess. What I'm 11 saying is if you start describing the letter of intent, I 12 was warning you --- I thought ---. 13 A. Oh, yes. But I think it's --- I can say without 14 revealing anything, --- 15 Q. That’s fine, just don’t ---. 16 A. --- it's not limited. Yeah. 17 Q. Well, you’ve heard Mr. Cyrus' testimony and Mr. 18 McKeown's testimony of his --- well, let's stick to Mr. 19 Cyrus' testimony, that it's outsourcing of interstate gas 20 supply, not local supply. 21 A. Well, but I'm not sure if Mr. Cyrus adequately 22 understands what that means for Hope. Hope has, what I 23 would call, two sources of local gas flow. One is a 24 local gas supply that is directly delivered into Hope's 25 distribution system. And also local gas supply that is
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1 transported on interstate facilities, primarily owned by 2 Dominion. They do have some, relatively small amount, 3 owned by Equitrans. 4 So I have never got a sense from Mr. Cyrus that 5 he understood that distinction. If he's talking about 6 gas that is delivered --- local gas directly delivered to 7 the Hope distribution system, that is --- I had this 8 number in my head yesterday and now I can't recall it. 9 It is probably somewhere around a quarter to a third of 10 the supply. It's a smaller number than what we talked 11 about heretofore as the local gas supply for Hope. 12 Q. So your conclusion is, since you've been hearing 13 numbers that are bigger than a third, that part of a 14 local production is actually local gas that's put on an 15 interstate pipeline --- 16 A. Yes. 17 Q. --- to get into the Hope system? 18 A. Yes. 19 Q. Somebody else's interstate ending up in the Hope 20 system? 21 A. Yes. 22 Q. Is that the part that troubles you? 23 A. Well, no. The whole outsourcing of gas 24 procurement troubles me. I just wanted to clarify that 25 issue with regard to what Mr. Cyrus said.
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1 Q. One other issue that I --- you know, I want to 2 keep after in repeating, there seems to be a concern with 3 somehow dealing with a third party is going to cause an 4 inability to examine lowest cost gas supply in a Rule 5 30-C proceeding. Is that what you fear? 6 A. That's one of the issues. There are several 7 issues that I raised in my testimony about that. But the 8 scenario that Mr. Patterson asked me about is just the 9 problem. Unless you can see the entire range of 10 operations, and who has time to do that, you don’t know 11 the --- all we would be presented would be --- mostly 12 likely would be a transaction confirmation sheet from PPL 13 on behalf of Hope. We won't know if that is tied in any 14 way, shape or form to another transaction that PPL is 15 engaged in, that if some substance damages Hope and 16 reduces, PPL is fine. 17 Q. Well, number one, there's nothing Hope can --- 18 there's nothing that the New Hope Steel River can do to 19 remove in some way through a third party its 20 responsibility to the Commission and the ratepayers to 21 come in on an annual basis in a 30-C and show the 22 appropriateness of its gas cost; right? I mean, that's 23 Hope. 24 A. Hope will still have to meet that standard, yes. 25 Q. And there's also nothing that removes an LDC's,
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1 in this case Steel River's, obligation to provide the 2 information that will allow reviews of the Staff, CAD and 3 anybody else that's interested, obviously the Commission 4 ultimately, to demonstrate to them that they've purchased 5 the lowest cost gas; right? 6 A. Well, no. The transaction I just talked about 7 will be very problematic from two aspects. One is I feel 8 confident we'll have a dogfight with PPL Energy if --- 9 try to look into their transactions that don’t involve 10 Hope but, from my standpoint, that implicate Hope. Just 11 getting that information is going to be a problem. And 12 in the 30-C timeline that we have, the last thing I want 13 to do is look at everything that PPL Energy does. It's 14 just not practical. But I know that it can have an 15 impact. So it's a conundrum from my standpoint. 16 Q. So it's not really the information that Hope 17 would supply to demonstrate that it's purchasing the 18 lowest cost gas for its ratepayers that you're worried 19 about, it's something going on at PPL that you're worried 20 about, PPL Energy? 21 A. That's one of my concerns. I don’t want to 22 limit it to that, but it's a one of my concerns, yes. 23 Q. That you think will have some impact on Hope? 24 A. I can't say --- well, if the money's there and 25 PPL Energy will benefit, I think yes, it will have an
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1 impact on Hope, but I can't tell you today. Obviously 2 that’s speculation as to what's actually going to happen. 3 Q. Well, Mr. Harris, let me just say I've heard you 4 say that and I heard Mr. Down --- I heard Mr. Downey say 5 if the money's there, it's a private corporation. I 6 mean, that same incentive exists for every vendor, you 7 know, every person that deals with every other person in 8 a commercial transaction, somebody's probably going to 9 try to maximize their profit. And that happens today 10 when Hope has to review and make decisions on low cost 11 gas; right? 12 A. Well, no. I mean, low cost gas, under my view 13 of how it should be, if you have a buyer buying on behalf 14 of Hope solely, they don’t have to worry about some other 15 transaction. 16 Q. Well, ---. 17 A. It's contingent upon another transaction ---.
18 CHAIR: 19 Wait. Repeat your answer. I'm sure 20 she didn’t hear it because I didn’t. 21 A. If you have someone buying on behalf of Hope, 22 solely on behalf of Hope, they don’t have to be concerned 23 about whether the offer that they're taking is contingent 24 or based upon some other transaction. 25 BY ATTORNEY FEINBERG:
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1 Q. Well, let's move to the series of --- let's move 2 to the six managers in Clarksburg, as I call it. The 3 first part of that, when you say you want Hope's 4 headquarters in Clarksburg --- you and Mr. McDonald 5 talked about this. So I don’t want to portray it as six 6 managers. There is that piece too. You question whether 7 what exists there now is a headquarters? 8 A. That's correct. 9 Q. Clearly, it's a central office of Hope's; right? 10 A. Yes. 11 Q. So it's a definitional thing here based on your 12 judgment that it's not really headquarters and it needs 13 to be a headquarters? 14 A. Yes. 15 Q. Well, you've heard Mr. Cyrus' testimony, haven’t 16 you, that there will be a go-to person for Hope so that 17 it kind of equals the president or number one person in 18 your list of people? 19 A. That person would be in Pittsburgh. 20 Q. Yeah, but you agree that's a president? 21 A. Yes. I'm not sure that's the same as the go-to 22 person but that's ---. 23 Q. Okay. Yeah. 24 A. I understand it would be a president in 25 Pittsburgh.
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1 Q. Yeah. Of Hope? 2 A. Well, not just at Hope, unfortunately. Of both 3 companies. 4 Q. And your quarrel is that person might have other 5 duties with respect to People's and that that person may 6 not be in Clarksburg, he or she may be in Pittsburgh? 7 A. Yes. 8 Q. Now, you listed some other functions. And do 9 you agree that in your Counsel's discussion with Mr. 10 Cyrus some names were mentioned of people that are in 11 Clarksburg that will fit some of the functions that 12 you've mentioned? 13 A. Well ---. 14 Q. Ms. Manley is one. 15 A. Pardon? 16 Q. Ms. Manely is one that I heard mentioned. 17 A. Yes, I was a little bit disturbed that Mr. Cyrus 18 did not seem to know who these people were. We had to 19 tell him who these people were. So that is a somewhat 20 concerning. 21 Q. Well, that’s ---. 22 A. Ms. Manley, if she does stay on, would meet that 23 ID there. 24 Q. And he clearly --- and my recollection is he 25 clearly had spoken to her and knew her name right away.
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1 And he also mentioned Mr. Herron, though he couldn’t 2 remember his name. And as soon as you said it ---. And 3 he spoke of him being an operational --- one of the six 4 positions you mentioned. And he's in Clarksburg; right? 5 A. Right. I'm not sure that these people are 6 staying on. They have many years under Dominion. And 7 there's --- as we all get to a certain age, there's 8 always a pension issue involved and whether or not 9 they're retiring in Dominion. 10 Q. Will you at least concede that the functions 11 that you're talking about exist in Clarksburg now for 12 those two positions? 13 A. For those two, yes. 14 Q. And you're right. Nobody can guarantee somebody 15 who's been at Hope, let's say, for 30 years is going to 16 be there on closing. But there are other possibilities 17 about what people might do; right? You might retire and 18 apply for the posting of the next job; right? 19 A. Sure. 20 Q. Okay. 21 A. All I'm saying is that is more likely to happen 22 if the Commission includes that as a requirement, a 23 condition, in the order. 24 Q. Right. And it would be inappropriate for Steel 25 River to be approaching Dominion Hope people and doing
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1 anything --- at this stage and doing anything other than 2 having discussions with them and telling them they're 3 interested in talking to them after they make their 4 decision on closing? 5 A. I suppose, yes. 6 Q. All right. Well, would you agree on the 7 five-year rate freeze comment that the next condition --- 8 that your condition eight, that such a moratorium would 9 exasperate some of the problems that you've actually 10 mentioned as your concerns with Hope? If one couldn’t 11 have a rate increase for five years, making some of the 12 decisions that you would like to see made on managers and 13 better service at Hope would be pretty difficult to do if 14 you knew your rates couldn’t go up? 15 A. No, I don’t see that connection. 16 Q. Well, if there are ---. 17 A. As I answered to Mr. McDonald, the cost for 18 these functions is part of Hope's rates. They're just 19 not people who are devoted to operations of Hope solely. 20 Q. But I think the point I'm making is if you tell 21 somebody their rates are going to be frozen for five 22 years and they haven’t hired some of the positions you 23 want and they haven’t done some of the things that you 24 want, it ties the hands of the utility to be able to go 25 out and add new people and new whatever it might need
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1 because they're looking at a pretty long window there 2 without a rate increase. 3 A. Yes, but your rates would include --- let's take 4 the company president. There's all sort of presidential 5 and managerial costs that flow down through the service 6 company billings and through a portion of Mr. Klink's 7 salary and who knows --- else in the organizational chain 8 that is in --- would be in the rates today. And it 9 wouldn’t be --- you hire a president, you would be paying 10 him probably --- unless that gets allocated through 11 Dominion for that function. 12 Q. But your complaint is that that's not working 13 and that there should be more time dedicated to Hope by 14 people in Clarksburg? 15 A. Yes. 16 Q. Doesn’t that seem like that would cost more to 17 have a full-time person there? 18 A. Given my experience with Dominion, I don’t --- I 19 wouldn’t make that presumption. 20 Q. But we're not Dominion. 21 A. But Dominion's costs are in your rates. 22 Q. I guess what I'm reacting to is it does appear 23 on this issue that you have large problems with what 24 Dominion has done in the past? 25 A. Yes.
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1 Q. And you're visiting those problems upon a new 2 owner who's at least asserting in testimony and evidence 3 and every place they can, he can, Mr. Cyrus, that he 4 wants to operate a different way. So why are you seeking 5 to penalize Steel River for Dominion's deficiencies, as 6 you call them, in the past? 7 A. I don’t know how more clearly I can say this. 8 If those costs were already in your rates and you're just 9 replacing those costs with people who are actually 10 devoted to Hope's operations, you won't have a different 11 increased cost. Also in this whole discussion, the 12 five-year moratorium has more than just --- reflects more 13 items than just these matters. 14 Q. Your condition number six is the one about no 15 financing cost or that Steel River, itself, has to be 16 responsible for financing cost increases for the first 17 five years that it owns the company. Would you agree 18 that if Dominion Hope owns the company, you wouldn’t be 19 able to prevent Dominion Hope from incurring new 20 financing costs over the next five years? 21 A. Subject to any prudent review, yes. 22 Q. So I mean, you're seeking --- at least that 23 there's a suggestion that you're seeking to tie Steel 24 River's hands from going to market and incurring debt to 25 try to do what needs to be done at Dominion Hope when it
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1 becomes a Steel River company when you say you won't have 2 to --- you can't incur financing cost? 3 A. Well, these were costs that will not be incurred 4 but for the acquisition is what we're talking about. 5 Q. But you agreed with me that Dominion Hope could 6 go out and get financing at any time? The example is in 7 2011 ---. 8 A. If they need to. But there's a certain amount 9 of financing that will take place solely, solely, because 10 of the acquisition. 11 Q. Well, you know, don’t you, that Dominion has, as 12 we've said already, $40 million 2011, and then another 13 component in 2014 of debt that matures and they're going 14 to be replaced? 15 A. Yes. 16 Q. And that's going to incur financing costs? 17 A. Yes. 18 Q. That's all. I mean, that's all on that point. 19 The number seven is the hold harmless rate adjustment 20 that we talked about, the removal of ADIT and ADITC, 21 therefore increased rate base for Steel River over and 22 above what rate base would be for Dominion Hope. 23 A. Yes. 24 Q. Surely, I know you've read Mr. Warren's 25 testimony, heard him talk, et cetera, and so forth.
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1 A. Yes. 2 Q. Well, do you agree that he sees a hold harmless 3 provision, no matter whatever it's called, rate-making 4 shield, hold harmless, as a normalization violation? 5 A. I agree that's his testimony. 6 Q. Okay. But I'll give you a chance on another 7 issue in a minute on that. But would you at least agree 8 with me that a normalization penalty, that is, the loss 9 of use of accelerated depreciation forever, is a far 10 bigger penalty to pay than the amounts involved in the 11 ADIC? 12 A. I will accept that. I haven’t done the 13 calculation. It sounds like it. I mean, it's likely to 14 occur. 15 Q. Well, and to give you a chance, you don’t agree 16 with Mr. Warren? 17 A. No, no. Mr. Warren also doesn’t believe in 18 consolidated tax savings. He believes that’s somehow a 19 violation of normalization, I believe. And clearly even 20 during --- well, since 1982 the Commission is doing some 21 sort of flowthrough of consolidated tax relief, since 22 I've been here. 23 Q. But apparently CAD has made the decision that 24 it's appropriate to implement this rate making or hold 25 harmless --- hold harmless rate-making and take the
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1 chance that the Internal Revenue code would see it as a 2 normalization violation? 3 A. Well, I think our --- again, from a policy 4 standpoint, I think the Commission has to do --- if it is 5 going to approve the acquisition, the Commission has to 6 protect the customers from the harms, the financial 7 harms, that would result from that acquisition. Whether 8 you call it the hold harmless adjustment or whatever, it 9 doesn’t really matter to me. I just think we need to 10 make sure that customers are not financially harmed from 11 the acquisition. 12 Q. Let's get a couple numbers in the record that I 13 know, you know, Mr. Harris. CAD's rate base in this 14 case, recommended rate base, $135 million; right? 15 A. I'll accept that, yes. 16 Q. Staff's is $81? 17 A. I believe that's correct. 18 Q. The company's $167 million? 19 A. Sounds right. 20 Q. Has the CAD done any present value calculations 21 on any of the ADIC issues? 22 A. No, I did not. I guess I could --- I'm certain 23 that it's more than the $8.7 million that’s been offered.
24 ATTORNEY FEINBERG: 25 If I could have a minute, Your Honor?
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1 Thank you. 2 COUNSEL REVIEWS DOCUMENTS 3 BY ATTORNEY FEINBERG: 4 Q. Let's turn to your rate case testimony for a 5 second. I won't take as long. That is CAD Number Two 6 --- or Number Three. Now, I'm not going to take very 7 long. It's a little bit of déjà vu. But I'd like to ask 8 you a couple of questions about your end results of your 9 class cost of service study. 10 A. Okay. 11 Q. What happens if you put together a recommended 12 allocation from your study --- actually, I'm not going to 13 ask you about the study. I'm going to ask you about the 14 end results of your study. You talk about it on page 15 five, but I don’t think you'll need your testimony to 16 answer, based on past experience. What happens if you 17 put together an allocation that increases large 18 transportation customers usually on this system, LCIDS, 19 but many LCIDS, such that they determine to go to 20 alternate fuel or buy gas? I mean, what happens with the 21 dollars that came from those customers to Hope? 22 A. Well, first of all, I don’t think that will 23 happen. But obviously Hope loses those revenues. 24 Q. And I understand you don’t think it'll happen. 25 And would you agree that some of those customers are lost
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1 forever then? 2 A. No. 3 Q. You think eventually Hope wins them back? 4 A. Yes. They would still have the facilities 5 there, they could compete with whatever the bypass was 6 potentially. 7 Q. And in fact, they may compete before the bypass 8 actually occurs? That's part of the Commission's bypass 9 rules? 10 A. Right. 11 Q. Well, whether they win them back or whether they 12 keep them from leaving, doesn’t the utility, in this case 13 Steel River Hope, we'll say, is what I'm concerned about, 14 have to lower its price in order to keep the customers? 15 A. No, I don’t think that necessarily holds. I 16 mean, we've been chasing around this barn with Hope since 17 1984. And to my knowledge, no customer has left the 18 system, any of thee large customers. And we're talking 19 about two cents per mfc on the LCIDS customer. They lose 20 ten times that in one movement of the NYMEX market over a 21 15-minute period. 22 Q. I understand it's two cents on LCIDS. Its 16 23 cents on LCID; right? 24 A. Nine somewhere. 25 Q. Nine cents?
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1 A. Nine cents. Sixteen (16) on the WSK. 2 Q. But again, the only point I'm trying to 3 establish here is if there are lost customers. If. And 4 I understand you don’t think it happens. That's lost 5 revenues to Dominion Hope in the case of before closing 6 or Steel River Hope afterwards? 7 A. That's correct. 8 Q. And if you lose revenues, to the extent those 9 revenues cover fixed costs, and the customer stays gone, 10 then other customers have to pick up those costs in the 11 next rate case; right? 12 A. If you don’t have commensurate reductions in 13 cost, you lose revenues, yes. 14 Q. And in a short period of time --- or in the 15 period of time between the lost customer and the next 16 rate case, it's, you know, lost dollars to the utility? 17 A. That's correct. 18 Q. On the accelerated steel replacement plan that 19 you recommend to be rejected by the Commission, and your 20 testimony starts on 18, you got a phrase on line 18 and 21 19 that it is designed to circumvent the Commission's 22 rate making process? 23 A. Yes. 24 Q. First, just to be clear, Mr. McDonald gave you a 25 few examples like jobs, line loss, maintenance, lower
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1 maintenance costs. Those are mine. He gave you some. 2 That's a reason for having accelerated steel --- bare 3 steel replacement program too? By that ---. 4 A. I understand those are the reasons that, I 5 believe, Mr. Kinney cited in his testimony. 6 Q. Well, you don’t disagree with the fact that they 7 are reasons to replace bare steel, do you? 8 A. Well, jobs, I don’t know --- I don’t --- I'm not 9 intimately familiar with the number of employees at Hope 10 and what their work duties are, whether or not they can 11 handle those existing employees. I don’t know. Line 12 loss, presumably will go down. Other O&M presumably 13 would go down, yes. 14 Q. But your concern is that it circumvents, using 15 your word, circumvents the Commission's rate making 16 process? 17 A. Yes. 18 Q. I just want to be sure, Mr. Harris. You're not 19 suggesting that Hope file --- that Dominion Hope file a 20 plan or that Steel River advocates a plan that didn’t 21 allow Commission review and a Commission determination of 22 appropriate rates, are you? 23 A. No. No. But it's obviously increasing the 24 rates outside of the Rule 42 proceeding, which are --- 25 Q. But it's not ---.
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1 A. --- not rate making. 2 Q. I'm sorry. It's not circumventing the rate 3 making process; right? 4 A. It may be. I don’t want to get into semantical 5 argument. It is clearly outside the Rule 42, which is 6 the --- and combined with Rule 30-C, Commission rate 7 making procedures for gas utilities. 8 Q. Right. And although the application said put in 9 a 30-C, Commission could approve the application and put 10 it in a separate and apart proceeding. Now, I realize 11 that it’s still not a 42-T. And I'm getting to that. 12 But I mean, it doesn’t have to be in a 30-C. In other 13 words, it can receive whatever scrutiny the Commission 14 would believe it would be appropriate for such a plan; 15 right? 16 A. It could, yes. 17 Q. Just like your complaint about a 60-day time 18 window could be become a 90 or a 120-day? 19 A. Or a 270-day. 20 Q. Well, but that's part of the problem; right? If 21 you take a longer time, then it's not a quicker recovery 22 of these additional costs that are attempts to do some of 23 the other things that I've read to --- that I've talked 24 about? 25 A. Okay.
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1 Q. And I'm sure we agree that we're going to 2 disagree on this? 3 A. I think that's correct. 4 Q. We do agree that there are a number of things 5 that are considered separate and apart from a Rule 42 6 case by this Commission, including gas costs, purchased 7 fuel costs for the utility, increased cost for scrubbers 8 that get thrown into the ENEC, line-clearing expenses 9 that can be thrown into an ENEC? 10 A. Unfortunately, yes. 11 Q. So it's not this magical little thing that never 12 happens. It happens; right? 13 A. It happens, yes. 14 Q. And presumably, it's because the Commission made 15 a decision that it's an important thing to have as a part 16 of a separate proceeding? 17 A. The Commission made those decisions for their 18 own reasons.
19 ATTORNEY FEINBERG: 20 That's all I have, Your Honor. 21 CHAIR: 22 All right. Staff? 23 ATTORNEY BRASWELL: 24 Thank you, Your Honor. 25 CROSS EXAMINATION
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1 BY ATTORNEY BRASWELL: 2 Q. Mr. Harris, I just have a very few clarification 3 questions. During your Cross Examination, you described 4 a distinction in your mind between local gas from the 5 West Virginia area that is directly placed in Hope's 6 distribution system and local gas from an interstate 7 system. Do you remember that --- 8 A. Yes, I do. 9 Q. --- distinction? Is there a price distinction 10 between those two different kinds of local gas? 11 A. It's difficult to say because there's a mix of 12 contracts on ---. But generally speaking, if you have 13 both contracts interstate based upon the first of the 14 month DTI index, the local gas that's transported by DTI 15 would have a commodity transportation charge associated 16 with it. 17 Q. Okay. All right. Also, I wanted to ask you 18 just to clarify for the record. You indicated that 19 you're using a certain definition of throughput that is 20 different than Mr. Gregorini's, but you didn’t really 21 define what that was. I'm just curious for the record. 22 A. Okay. Well, throughput means all of the gas 23 that flows through the utility's facilities. And if I 24 might, I need to correct --- I slightly misspoke when I 25 referred to Mr. McDonald. Mr. Gregorini did use
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1 throughput, he has a list in his provided testimony of 2 about seven accounts that he said --- primarily 3 distribution accounts that he said that he used 4 throughput, and then --- this is all in his argument 5 about how they have used throughput to allocate a portion 6 of administrative and general costs. 7 And he lists about seven accounts that make up 8 the factor that he used to allocate administrative and 9 general costs. And I think I said to Mr. McDonald that 10 Mr. Gregorini did not use throughput. He did use 11 throughput for, I think, two of the very --- of the 12 smallest accounts in this list. So I overstated the 13 case. For all intents and purposes, he didn’t use 14 throughput because for the major accounts, that impacted 15 the allocation. He did not use throughput as defined as 16 all of the gas, both sales and transportation, as well as 17 the utility's facilities. 18 Q. This is just a yes or no question. Do you know 19 whether the proposed bare steel replacement tariff 20 includes a return component? 21 A. I shouldn't suppose. It's been a while since 22 I've looked at that tariff, quite frankly. 23 Q. And you, under Cross Examination, talked about 24 different kinds of proceedings outside of base rate cases 25 that include basically things other than purchase cost or
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1 may include a return component. Are you aware of any 2 kind of proceedings for gas utilities outside a Rule 42 3 proceeding that allow a gas utility to earn a return? 4 A. Not on an ongoing basis. The Commission has --- 5 there was, once upon a time, a program for West Virginia 6 Power Gas Services in the mid 1980s that was bare steel 7 replacement program. And partially based upon my 8 experience with that program is also part of why I don’t 9 believe this is a good idea. So I can't say 10 categorically the Commission's never done that. But ---
11 CHAIR: 12 Did that ---? 13 A. --- that's the only exception I can think of 14 right now. 15 CHAIR: 16 I'm sorry. Did that program have a 17 rate of return component to it? 18 A. Yes, it did. 19 ATTORNEY BRASWELL: 20 All right. Those were my only 21 questions. Thank you. 22 CHAIR: 23 All right. It's 11:50. We're going to 24 break until one o'clock. When we return, we'll ask our 25 questions and then you can redirect.
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1 LUNCH BREAK TAKEN 2 CHAIR: 3 I gave or asked questions of the 4 principals in the other --- the applicants and gave them 5 an opportunity for some speech. I thought you pretty 6 much handled that from the witness stand this morning. 7 But is there anything further you want to add in your 8 rebuttal to Mr. Klink. But if there's anything else 9 you'd like to add by way of why you think this --- what 10 you think the Commission should do and why, we'd be glad 11 to listen to it. 12 A. Well, I guess I can say is a more difficult 13 decision obviously. It's obvious from my testimony, we 14 do not believe Dominion has been a good steward of the 15 Hope assets. On the other hand, the proposed transaction 16 will result in a number of ratepayer problems. And I 17 believe in song, the acquisition should not be approved 18 without the conditions that we have placed on it. 19 I think, I don’t --- I still --- even after 20 hearing Mr. Kinney's and Mr. Cyrus' testimonies, I don’t 21 think they addressed the management issues with Hope. 22 And I think those are going to be significant problems. 23 I think they are problems today and I think they will be 24 significant problems unless they're addressed in a 25 fashion that focuses on Hope instead of on PH Gas.
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1 CHAIR: 2 It always sort of troubles me that we 3 --- well, let me ask you this. With respect to Hope 4 service generally, quality of service, is there much of a 5 problem with their service? I mean, they're just --- my 6 own reaction is we don’t see much of it. And I realize 7 there was a dispute earlier about tax on gathering lines 8 and that sort of thing. But that was in 2004 and carried 9 for a while. But is that ongoing? Is that a dispute 10 that goes on right now? 11 A. Well, I think Mr. deGruyter has recommended that 12 that arrangement be firmed up so that once Dominion is 13 gone, we have a very certain --- we don’t want a 14 situation where people can't get service. So ---.
15 CHAIR: 16 Is that a proposed condition anywhere? 17 A. I think it is in Staff's testimony. 18 CHAIR: 19 Okay. 20 A. So that remains a concern, what happens once 21 Dominion's gone. But actively, I think it's operating 22 actively currently as it should, and people are getting 23 the services as they should.
24 CHAIR: 25 Now, when I was out there, one of the
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1 things that I was troubled --- and I'd like you to talk a 2 little bit about it, I guess. We would let utilities 3 that were poorly managed, poorly operating and providing 4 terrible service go in a heartbeat. And those that 5 weren’t, we would have untold pages of conditions and so 6 forth before we'd let them out. And it always struck me 7 as an odd approach, that those that aren’t performing 8 well, we give them the red carpet, I'll say. And those 9 that are performing well, we just beat within an inch of 10 their life. And I understand --- I understand why we do 11 it now that I'm up here. But it does seem like kind of a 12 paradox to me. Do you have any thoughts on ---? 13 A. Well, the most glaring example I can think of 14 would have been the Clay County company, Wagner Gas.
15 CHAIR: 16 Sure. 17 A. You could hardly do worse than that, what that 18 management was. And so it did seem to arise. There is 19 that paradox. I would say that probably is more the 20 case, that whatever the faults of the utility that is 21 taking over the existing one, the new existing ones, is 22 so poorly run that you just can't get any worse than 23 that.
24 CHAIR: 25 I feel like I'm just jumping into deep
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1 water every time I talk about it, but the 338 election. 2 The ratepayers that have been here have had the advantage 3 of the lower rate base and the lower taxes that resulted 4 from the accelerated depreciation; is that correct? 5 A. Well, no, they haven’t had the advantage of the 6 lower taxes because that's what normalization is. You 7 can't flow through that benefit. 8 CHAIR: 9 Well, I'm sorry. They've had ---. 10 A. We take it as a rate base deduction.
11 CHAIR: 12 All right. They've had the rate base 13 deduction and they have had --- depreciation has been 14 normalized at a standard rate? 15 A. Yes. 16 CHAIR: 17 Right. Okay. Is there a model that 18 can be run --- what if the deal is approved and the rate 19 bases restored or whatever term you use? Is there --- 20 and you go forward then. Is there a crossover at some 21 point? Does the --- and that's why I was asking if 22 there's a --- if you have a model that you run. Is there 23 a point at which the offset becomes --- crosses over and 24 it becomes an advantage? 25 A. I think theoretically, yes. But the only thing
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1 that is in record, I believe, now is in the exhibit to 2 Mr. Smith's Supplemental testimony, which we received a 3 late filed dated response that allowed him to make that 4 calculation of the revenue department impact. And I 5 think it's for an 18-year horizon. If you look at the 6 very last column, you can see that the impact had 7 switched from a negative to a positive. It's a very 8 small number in either case, year 17 or year 18. But 9 there is a ---.
10 CHAIR: 11 Only for a year or two? Or is it the 12 two-year ---? 13 A. You're out of my ---. 14 CHAIR: 15 I'm out of mine, too, so --- 16 A. Okay. 17 CHAIR: 18 --- I understand. Well, maybe we'll 19 ask ---. 20 A. But theoretically, if you're normalizing, I 21 think there should be a crossover somewhere. 22 CHAIR: 23 Well, just thinking back, I was 24 wondering whether or not you had explored the possibility 25 of requiring some sort of --- and I don’t know, maybe
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1 that destroys the normalization as well. Some sort of, I 2 don’t know, cost-free loan, for instance, or an evening 3 out of that way in some fashion to sort of ameliorate the 4 impact of that offset. Or is that the very evil that 5 we're attempting to avoid here? 6 A. Well, I think Mr. Warren's testimony is anything 7 you do is going to violate normalization. I think you 8 could --- I can't imagine that a Commission could not 9 have an acquisition adjustment. We did it in 10 Mountaineer, as a matter of fact, in 1984 when it 11 was ---.
12 CHAIR: 13 But that was --- let me ask you this. 14 A. But there are a number of issues here that you 15 can decide --- lump them together and decide the number 16 is X and just use that as a ---. 17 CHAIR: 18 And say these all amount to X amount of 19 rate basing? 20 A. Pardon? 21 CHAIR: 22 Just say these all amount to X amount 23 of rate base and ---? 24 A. They then would be amortized over a certain 25 period.
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1 CHAIR: 2 The problem in the Mountaineer case was 3 the assets in the subsidiary and the various sales that 4 came in. And there was a --- you're right. There was a 5 significant rate base distinction. But was there the --- 6 was the issue with respect to --- there was no election, 7 338 election, involved in that case. We did make it a 8 rate base adjustment. 9 A. Well, the rate base that you --- the one I was 10 referring to actually was the 1984 purchase --- or was it 11 '86? Purchase of Mountaineer by Allegheny & Western. We 12 had an acquisition adjustment. In the most recent 13 acquisition of Mountaineer, we settled on a rate base 14 number, which if you look behind, it was a --- you know, 15 a composite of things. And there was a 338 election in 16 that case.
17 CHAIR: 18 That was a stock sale case. 19 A. Pardon? 20 CHAIR: 21 Yeah, that was the stock ---. 22 A. That was a settled case, yes. 23 CHAIR: 24 No, I know that. This is the first 25 effort to talk about the hold harmless proposal for
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1 settlement of a 338 issue though; is that right? I'm 2 simply asking. I'm not aware of having seen it anywhere. 3 A. I can't recall. 4 CHAIR: 5 The questions you had with respect to 6 the Clarksburg office --- and while I understand that 7 they made a promise in --- and your testimony I think, 8 which recites that they promised to keep the office here 9 in, what, 1980 ---? 10 A. '84, which would have been ---
11 CHAIR: 12 '84. 13 A. --- when Dominion acquired the consolidated 14 assets in 1999, I think. 15 CHAIR: 16 There's no statute of limitations on 17 promising to keep your office somewhere? 18 A. Well, it was never a condition otherwise by the 19 Commission. It was just the condition was you'll keep 20 your headquarters in Clarksburg. 21 CHAIR: 22 In the era of virtual offices, isn’t it 23 --- I mean, that's another thing that strikes me as a 24 little odd, that we need to have them physically located 25 in one place. I mean, we --- I operate from all over the
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1 east coast, like I'm in this office upstairs on occasion. 2 And is that --- I mean, is it your feeling that without 3 their physical presence, we can't put in place the kinds 4 of controls and tracking that we otherwise need? 5 A. No, I don’t think I'd go that far. Mostly --- 6 part of what that is, is I'm just defending an order of 7 the Commission. 8 CHAIR: 9 Sure. Yeah, and we appreciate that, 10 sir. 11 A. And you're correct, people can be ---. But the 12 focus has to be on Hope. I don’t think it's adequate to 13 say someone is going to be in Pittsburgh and will be 14 doing this for PH Gas.
15 CHAIR: 16 Okay. You're ---. 17 A. I don’t think that's what ---. 18 CHAIR: 19 Your concern's the division of 20 responsibilities that people carry; is that correct? 21 A. Yes, and particularly at the top. There has to 22 be --- I'm sure you're aware of this. In any large 23 organization, multi-state utility, there are all these 24 disputes about any number of things, how resources are 25 going to be allocated, what positions are going to be
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1 taken on various things. You need a person with 2 significant --- enough heft, if you will, in the 3 organization to say this is what I need for Hope West 4 Virginia. And you need someone who's going to fight for 5 Hope West Virginia. I think that's crucial, absolutely 6 crucial. 7 CHAIR: 8 You indicate that --- on page seven of 9 your testimony. I'm sure I'm in the sale case. Yeah, 10 the acquisition. Page seven at line ten. Well, I guess 11 its line 20. That Dominion has systematically stripped 12 Hope of most of its West Virginia based employees in the 13 operational, managerial and customer services activities. 14 What is the --- do you have the actual numbers for what 15 has happened? The numbers of the employees that have 16 been --- that were there at the start and are moved out 17 and no longer available? 18 A. Yes, on page nine, beginning with line 15. 19 January 2001, Hope had 327 employees. And now they only 20 have 195 employees.
21 CHAIR: 22 You know, we have had discussions in 23 the water company cases about, you know, that could be a 24 measure of efficiency. I realize that's the last thing 25 you'd agree. But customers per employee is always one of
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1 things that the water company, for instance, is so proud 2 of. And the CAD in those cases have always argued that 3 they needed to do more and cut more and cut payroll. And 4 I mean, is this possibly the other side of the coin here? 5 I mean, you said that their service is not all that bad. 6 So it sounds like maybe they're doing the same thing with 7 a lot fewer employees. 8 A. Well, I wouldn’t say --- given the list of 9 things that I think where they've fallen down, I wouldn't 10 say they're doing the same thing. But you're correct 11 that, as we sit here today, there aren’t a host of 12 operational difficulties that I'm aware of at least with 13 Hope. I don’t run the company. My experience is more 14 with the people who are in the gas-purchasing, rate 15 making, those functions, those functional areas. And I 16 don’t think those are the best ones.
17 CHAIR: 18 Just out of curiosity, are all of the 19 --- all the matters in your testimony that are --- begin 20 confidential, end confidential, in fact, still 21 confidential? 22 A. I doubt that all of them are but I have not gone 23 back and tried to parse that out.
24 CHAIR: 25 Well, if I ask --- well, I'm sure
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1 somebody will yell out if I ---. 2 A. If you ask anyone to do that, please ask Steel 3 River to do that. 4 CHAIR: 5 I think you had --- I had the same 6 question, and I think you answered it on the theory that 7 it's already billed into the rates. But when I read your 8 list of witnesses, I had written out to the side, how do 9 you swear that with a five-year rate freeze. And your 10 feeling is that that's --- or what you testified earlier, 11 was that already imbedded in rates? 12 A. Well, I believe with the five-year rate freeze 13 the TSA would be over --- you would be at a point --- you 14 wouldn’t have the double counting at the end of that 15 period. It would address the double counting issues.
16 CHAIR: 17 No, this was a discussion of the 18 management positions that you say are necessary. 19 A. Oh, yes. Yeah, those costs are in there for the 20 --- they'll be in rates today. Those managerial 21 positions or the functions are being performed throughout 22 the Dominion organization on behalf of Hope. 23 CHAIR: 24 But are portions of those salaries 25 being allocated to other operations?
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1 A. Yes. 2 CHAIR: 3 So today, since they are --- we are 4 getting billed for --- we. Hope and ultimately the 5 customers are being billed for a smaller portion than the 6 full salary of each of these individuals? 7 A. Well, I would think, as I answered to Mr. 8 Feinberg or maybe Mr. McDonald, if three people were 9 performing one third of their time doing a given function 10 and they hire one person, it's the same thing.
11 CHAIR: 12 Yeah, I understand that. 13 A. Obviously there may be some difference but I 14 don’t think it would be significant. 15 CHAIR: 16 What's the basis for the five-year 17 stand? I had written to the side wow, that seems strong. 18 I couldn’t think of a case where that was --- I'm sure 19 there are because I've been in all of them. But I can't 20 remember any case where I was ever in, maybe with the 21 exception of Mountaineer, that stayed out until it had a 22 full year under the new setup where there was an 23 agreement to stay out anywhere near that long or an 24 imposition by the Commission for a five-year stand. 25 A. I think five years would be longer than one I
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1 can think of. Mountaineer was a three-year term, I 2 think, initially. 3 CHAIR: 4 Thank you, sir. I appreciate it. 5 ATTORNEY SADE: 6 No questions, Your Honor. 7 CHAIR: 8 You have questions, Mr. McDonald?
9 ATTORNEY MCDONALD: 10 Yes. 11 RECROSS EXAMINATION 12 BY ATTORNEY MCDONALD: 13 Q. Mr. Harris, there was a discussion from, I 14 think, Mr. Cyrus yesterday about gas purchasing 15 responsibilities and some Cross of you about that today. 16 And I believe that you observed that maybe Steel River 17 did not appreciate the distinction between Hope's 18 purchasing gas that is delivered directly into Hope's 19 system and Hope's purchasing gas, local gas, that comes 20 through DTI. 21 A. Yes. 22 Q. Will you accept that the same Hope person who 23 buys local gas delivered directly into Hope also buys 24 local gas delivered into DTI, and then into Hope? 25 A. Actually, I thought it was one of two people,
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1 it's either, depending on the day, Fred Columbo or 2 Almquist. Almquist I believe is spelled A-L-M-Q-U-I-S-T. 3 Q. I'm not sure who that is but ---. 4 A. But I would accept that yes, all the gas 5 purchasing is done under Mr. Womper's (phonetic) 6 supervision in Richmond, both local and interstate. 7 Q. Well, I think the point is that I'm asserting, 8 and I hope that you agree, that all of the local West 9 Virginia gas purchases will be done by Hope people after 10 the acquisition of local gas, whether it's directly 11 delivered to the Hope system or delivered to DTI and then 12 back into Hope's system, would be an in-house function? 13 A. If that’s --- I haven’t seen anything to that. 14 I mean, like I said, there's nothing in the PPL Energy 15 agreement that lays that out. Mr. Cyrus' ---. 16 Q. We haven’t seen ---. 17 A. You haven’t seen that, I know. And I would say 18 it's, at best, unclear right now. 19 Q. We were enumerating earlier some of the special 20 rate programs the Commission has approved for gas 21 utilities. And we thought of two more, particularly that 22 have been in Hope's portfolio of program. One was the 23 IART Program, you remember, innovate and accelerate, rate 24 treatment program? 25 A. Oh, yes.
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1 Q. And what was the purpose of that? 2 A. That was to build --- extend pipelines in order 3 to take more local production into Hope's system. 4 Q. Yes, this was an incentive, as the gas markets 5 free up and pipelines became common carriers to encourage 6 the production of local West Virginia gas; correct? 7 A. Yes. 8 Q. And then there was another special program for a 9 few years called NGV program. Do you remember that one? 10 A. Yes. 11 Q. What was that? 12 A. The short answer is that it was a doornail. But 13 the long answer is it was a --- and it's a special rate 14 increment to deal with natural gas refueling stations. 15 Q. For vehicles? 16 A. For natural gas vehicle.. 17 Q. And effort to jumpstart the NGV, natural gas 18 vehicle, business? 19 A. And you can see how successful those investments 20 have been. 21 Q. Well, next is hydrogen. 22 A. Can hardly wait. 23 Q. Those all had return components built in, did 24 they not? 25 A. I'm sorry?
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1 Q. They had return components built in? 2 A. Oh, yes, they did. 3 ATTORNEY MCDONALD: 4 Thank you. That’s all. 5 ATTORNEY FEINBERG: 6 Thank you, Your Honor. 7 RECROSS EXAMINATION 8 BY ATTORNEY FEINBERG: 9 Q. Mr. Harris, in your answers to the Chairman 10 about a five-year moratorium, you indicated that any fear 11 of double counting relating to the TSA would end after 18 12 months; right? I don’t think you got the 18 months in 13 there. 14 A. Well, the TSA, as it exists today, my 15 understanding in the stock purchase agreement, is a 16 12-month agreement with the option to extend for six 17 months. An offer that we talked about is for an 18-month 18 agreement. 19 Q. So whether it's 12 or 18, after that time period 20 presumably Steel River would be providing those --- 21 A. Yes. 22 Q. --- those services? 23 A. And then one year after that date is when you 24 would have per book denials that only reflect Steel 25 River's cost.
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1 Q. Let's go back to the added number, ADIT number. 2 You put it on the record for Mr. Smith, 27 to 40. That 3 started day one of the closing; right? 4 A. I think his spreadsheet actually went from 2009 5 forward. 6 Q. And again, we have that same issue we talked 7 about quite a few times. Even though the law would 8 change rate base at closing, it wouldn’t have any impact 9 on ratepayers until the first rate case; right? 10 A. Yes. 11 Q. And all those years, let's say three --- yeah, 12 three, would disappear from any calculation of harm or 13 detriment to the ---? 14 A. If there was not a rate case, obviously it 15 wouldn’t have an impact. 16 Q. But sticking with your 27 or 40, this morning 17 you said you had not done any present value calculation. 18 You do agree generally that Mr. Smith's calculation --- 19 was it 18 or was it 20 years? 20 A. I recall 18 but --- 21 Q. I'll accept that. 22 A. --- it could have been 20 years. 23 Q. So it was 27 or 40 for 18 years, with the first 24 couple of years, arguably, zero? So it might be less 25 than 27 or 40. On that same thing we just said of no
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1 rate case. 2 A. Oh, if there's no rate case, yes, --- 3 Q. And if ---. 4 A. --- if there was a stay out or something. 5 Q. You would agree, wouldn’t you, that the present 6 value of that 27 to 40, perhaps reduced 27, 40, over some 7 period of time, 18 months, two years, three years, would 8 be quite a bit less than 27 to 40, would it? 9 A. Sure. Certainly. 10 Q. But you have no idea what it would be? 11 A. I haven't done that calculation. It would be 12 less, but I haven't done that calculation. 13 Q. Care to speculate? 14 A. No, I ---. I may be able to do math but I can't 15 do present value over an 18-year period in my head. 16 Q. Could it be 15? 17 A. It could be.
18 ATTORNEY FEINBERG: 19 Your Honor, I don’t have anything 20 further for Mr. Harris. 21 CHAIR: 22 Thank you, sir. 23 ATTORNEY PATTERSON: 24 I have one thing --- 25 CHAIR:
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1 Oh, I'm sorry. 2 ATTORNEY PATTERSON: 3 --- I'd like to ask. 4 CHAIR: 5 All right. 6 RECROSS EXAMINATION 7 BY ATTORNEY PATTERSON: 8 Q. Mr. Harris, given your testimony, I take it it's 9 not true that you will be the honoree at the Annual 10 Dominion Charity Golf Tournament next year that raises 11 money for West Virginia charities every year? 12 A. I think that the invitation got lost in the 13 mail.
14 ATTORNEY PATTERSON: 15 Thank you. 16 CHAIR: 17 Thank you, Mr. Harris. 18 A. Thank you. 19 CHAIR: 20 Okay. Who's next? 21 ATTORNEY SADE: 22 CAD calls Lynn White. 23 ------24 DEANNA LYNNE WHITE, HAVING FIRST BEEN DULY SWORN, 25 TESTIFIED AS FOLLOWS:
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1 ------2 DIRECT EXAMINATION 3 BY ATTORNEY SADE: 4 Q. State your name for the record, please. 5 A. Deanna Lynne White. 6 Q. And where are you employed, Ms. White? 7 A. I'm employed with the Consumer Advocate Division 8 of the Public Service Commission. 9 Q. And what is your job title and what are your 10 duties? 11 A. I'm a financial analyst and I participate in the 12 rate reviews and the filings. 13 Q. And how long have you been so employed? 14 A. I've been there a little less than two years. 15 Q. Is this your first time testifying on behalf of 16 the CAD? 17 A. Yes, it is. 18 Q. I don’t like it and I don’t think anybody else 19 in the room does. 20 A. I'm not so sure. 21 Q. Are you the same Lynne White who's prefiled two 22 separate pieces of testimony in this case? 23 A. Yes. 24 Q. And those would be your Direct testimony and 25 your Rebuttal testimony?
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1 A. Yes. 2 Q. Do you have copies of each of those in front of 3 you? 4 A. Yes, I do. 5 Q. And do you have any changes or modifications you 6 wish to make to your Direct testimony? 7 A. Yes, I would like to make some changes to number 8 --- on page 13. Starting with line 11, the last number 9 in that line should be 3.85 decatherms. On line 12, the 10 number should be corrected to be 6.094 decatherms. On 11 line 15, the first number should be 76537792. The second 12 number on that line should be 12038951. And then I'd 13 like to make ---.
14 ATTORNEY MCDONALD: 15 Could you repeat that ---? 16 A. Line 16 ---. 17 ATTORNEY MCDONALD: 18 I got the one on line 12 and then you 19 moved to line 15, did you? 20 A. Yes, on line 15 the first number is 76537792. 21 The second number is 12038951. And then I'd also like to 22 make a change on page 15. One line 14, that date should 23 be September 30, 2010.
24 BY ATTORNEY SADE: 25 Q. Is that it for your Direct testimony?
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1 A. Yes. 2 Q. And what about your Rebuttal? Do you have any 3 changes or modifications you need to make today? 4 A. No, I do not. 5 Q. I had your Direct testimony marked for 6 identification purposes as CAD 4 and your Rebuttal as 7 CAD 5. 8 (CAD Exhibits Four and Five marked for 9 identification.)
10 BY ATTORNEY SADE: 11 Q. Starting with your Direct testimony, considering 12 those changes that you've made, if you were asked any 13 questions in that testimony today, would your answers be 14 the same? 15 A. Yes, they would. 16 Q. And is the information you provided in your 17 answers in this testimony true and correct to the best of 18 your knowledge and belief? 19 A. Yes. 20 Q. And do you adopt that as your testimony in this 21 case? 22 A. Yes. 23 Q. And with regard to your Rebuttal testimony, if 24 you were asked the same questions today, would your 25 answers be the same?
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1 A. Yes. 2 Q. And is the information you provided in your 3 answers true and correct to the best of your knowledge 4 and belief? 5 A. Yes. 6 Q. Do you adopt your Rebuttal testimony as your 7 testimony in this proceeding? 8 A. Yes.
9 ATTORNEY SADE: 10 That's all I have. The witness is 11 available for Cross. 12 ATTORNEY PATTERSON: 13 No questions, Your Honor. 14 CHAIR: 15 All right. Mr. McDonald or Mr. ---? 16 ATTORNEY MCDONALD: 17 Thank you, sir. 18 CROSS EXAMINATION 19 BY ATTORNEY MCDONALD: 20 Q. Good afternoon. 21 A. Hello. 22 Q. We have been asserting throughout this 23 proceeding that if the acquisition goes through and the 24 sale closes and Hope switches from the LIFO to WACOG 25 method of accounting simultaneously, that there will be
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1 no O&M expense incurred by the company; right? And do 2 you agree with that? 3 A. When you say no O&M expense incurred by the 4 company, what are you --- 5 Q. All right. 6 A. --- implying to ---? 7 Q. Let's back up. Hope is required by Commission 8 decision to change its method of accounting for gas and 9 storage; correct, from LIFO to WACOG? 10 A. Yes. 11 Q. And Hope claims that the impact of the switch 12 will affect both rate base and O&M expenses; correct? 13 A. That is my understanding. That’s what they're 14 claiming. 15 Q. Hope also asserts that Hope must continue to 16 utilize LIFO for book purposes. Do you agree to that? 17 A. I agree that that is what they're claiming. 18 Q. You don’t agree that that's true. 19 A. I agree that's true in the short-term. 20 Q. Mr. McKeown testified that the difference 21 between the purchased gas costs recorded on the books 22 under LIFO and the purchase gas costs for, quote, 23 unquote, rate making purposes under WACOG cannot be 24 reflected in rates. Do you recall that testimony? 25 A. Yes.
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1 Q. And he said the difference is $25.6 million at 2 the time of his calculation; right? 3 A. That is what he asserts. 4 Q. That is what? 5 A. That's what he asserted in his testimony. 6 Q. You don’t agree with that; right? 7 A. No, as I indicated on my Direct testimony, I do 8 not. 9 Q. Then let's get back to where we started. If the 10 sale goes through and closes, no one is talking about an 11 impact to O&M expenses; correct, as a result of the 12 switch from LIFO to WACOG?
13 ATTORNEY SADE: 14 I'm sorry. Could you clarify what you 15 mean by no one is talking about ---? 16 ATTORNEY MCDONALD: 17 I don’t know how else to say it, Mr. 18 Sade. No one is claiming that there will be an O&M 19 expense impact on Hope if the sale goes through 20 attributable to the switch from LIFO to WACOG. 21 A. Well, as I indicated in my Direct testimony, I 22 do not believe there is an O&M expense related to the 23 switch.
24 BY ATTORNEY MCDONALD: 25 Q. I understand you're not willing to acknowledge
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1 that there's an expense. So I take it that you just 2 disagree with Mr. McKeown's testimony that the 3 Commission's requirement causes an impact that cannot be 4 reflected through rates unless the Commission makes some 5 special provision for that? 6 A. Well, there's a basic problem with Mr. McKeown's 7 testimony. When you have two inventory methods and 8 you're comparing them, you have a formula. You have a 9 beginning inventory. You buy inventory. Both of those 10 numbers are fixed, they're the storage. I have this much 11 on hand, I bought this much, I paid X for the new 12 inventory. Now, you sell the inventory and you have some 13 left. 14 If all that inventory's the same price, there's 15 no problem. If the inventory comes --- your beginning 16 inventory's a different price than the purchases, now 17 you've got a problem. How am I going to assign a cost to 18 the inventory I just sold? So you have if you --- in the 19 formula, if you give a different price to purchase costs 20 of goods sold, then you have a different ending 21 inventory. 22 So in the case of Mr. McKeown's testimony, he 23 has two variances. He has one variance in comparing the 24 two methods in cost of goods sold. And he has a second 25 variance in his ending inventory. So when you say he
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1 cannot claim in rate the cost of the switch, in fact, he 2 cannot claim in a 30-C filing that he received --- the 3 company received relief in the Rule 42T filing. It's an 4 increase in assets. And of course, that's a judgment 76. 5 Q. We both agree there should be a change in the 6 inventory balance as a result of the switch, don’t we? 7 A. Yes, there will be a change in the ending 8 inventory and a change in costs of good sold, two 9 variables. 10 Q. But we disagree on how to calculate the cost of 11 gas and inventory, do we not? We disagree on how to 12 re-price gas in inventory when we switch from LIFO to 13 WACOG? 14 A. I'm not sure I understand your question. 15 Q. Hope has made an O&M cost adjustment in 16 adjustment 15; correct? 17 A. Yeah. 18 Q. Do you agree that if gas prices increase, the 19 cost impact of adjustment 15 increases? If gas prices 20 decrease, the impact of adjustment 15 decreases? 21 A. Adjustment 15 is the difference in the two 22 inventory methods. It's a mathematical formula. 23 Beginning inventory plus purchases, minus cost of goods 24 sold equals ending inventory. The first two numbers are 25 fixed. Historic numbers can't be changed. The other two
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1 numbers interchange. So if your cost of goods or 2 variables is $10 and you still have $2 in inventory, 3 you've got $8 left in your ending inventory. If you 4 switch that and say the cost beginning is $8, then you 5 have $2 in ending inventory. 6 Q. Aren't you describing the effect on inventory 7 and not the effect on expense? 8 A. I'm describing both. It's a formula. It simply 9 is the cost of goods sold. Ending inventory is the 10 asset. That's why I called it a double dip. It's the 11 same thing. 12 Q. Do you agree or disagree that for Hope to use 13 LIFO on its books and WACOG for rate making that separate 14 costs will be recorded by Dominion Hope on its income 15 statement from the cost reflected in the PTA? 16 A. Well, in response to CAD's question 16, the 17 company provided materials where they discussed how they 18 will handle this event. And I'll just read. This is 19 from an internal memo from the company to Robert D. 20 Taylor. It's from Fred Sciullo, S-C-I-U-L-L-O. The date 21 is 6/15, 2006. And he says at the end of the day, there 22 is no impact on pre-tax income. And what I went with is 23 a higher storage asset balance and a lower cash balance. 24 The same --- he's essentially described the same formula 25 I'm describing.
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1 Q. Did you get any other discovery responses that 2 might have been different from that one, Ms. White? Or 3 have you seen any other ones that might be different than 4 ---? 5 A. Actually, I think we got 50 pages in that 6 discovery response. 7 Q. My question was did you get a discovery response 8 or have you had information that differs from what you 9 just read from, from 2006? 10 A. Well, I believe the company had ---. 11 Q. That's a pretty simple question, yes or no. 12 Have you gotten from the company any information that 13 contradicts that 2006 advice? 14 A. Well, I believe Mr. McKeown's testimony 15 contradicts this. I want to say the answer to that would 16 be ---. 17 Q. Do you have ---? 18 A. Well, there are 50 pages, and I'll have to say 19 that I don’t recall ones that are different. But of 20 course there's a possibility, 50 pages, that there is 21 something different.
22 ATTORNEY MCDONALD: 23 No further questions.
24 CHAIR: 25 Mr. Feinberg.
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1 ATTORNEY FEINBERG: 2 I'm sorry, Your Honor. I don’t have 3 any. 4 CHAIR: 5 All right. Staff? 6 ATTORNEY BRASWELL: 7 No questions. 8 CHAIR: 9 Redirect?
10 ATTORNEY SADE: 11 No, Your Honor. 12 A. Thank you. 13 CHAIR: 14 Wait, now. You need to ---. 15 ATTORNEY SADE: 16 You're not done yet. 17 A. Oh, sorry. I'm ready to escape. 18 CHAIR: 19 It's all right. Now that you're up 20 here, I almost feel like I have to ask you something. 21 Actually, I might not ---. I have a lot of agreeing but 22 I didn’t have any questions. 23 CHAIRMAN ALBERT REVIEWS DOCUMENTS
24 CHAIR: 25 Go to the top of page 16 of your Direct
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1 testimony and explain to me the question and answer that 2 appears at the top of that page, what it is that you're 3 attempting to do and how you decided on the basis for the 4 volume to use in calculating inventory. 5 A. Well, one thing that'll make it a little 6 clearer. The problem that I had, if you turn to page 7 seven where I'm showing the BCF by month. And you'll see 8 on page seven, the test year, of course, ends March 2008. 9 And on page seven, you can see that the blue one, which 10 is 2007, is quite a bit above the other three lines. As 11 an analyst, that's an immediate problem because I can 12 see. Visually I can see it's not representative. 13 2006 and 2007, I believe they were doing storage 14 arbitrage. So immediately I know I've got a problem with 15 the volume numbers. So I look at various 13-month 16 periods. And finally, I decided I'm going to use the 17 company's own model because that's a number they 18 provided. The model says we're putting in 6.4 BCF and 19 we're taking out 6.4 BCF. So the total volume for the 20 year of about 12 BCF. That's absolute value injection 21 and withdraws. 22 That's a little higher than they typically have, 23 but I just felt the --- you know, I thought the company's 24 numbers would be better since I didn’t have a clear 25 trend. Normally when you have a trend, if you have '06
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1 and '07 and they're high, then '08s going to be high as 2 well. Well, '08 is one of their lowest inventory volumes 3 since 2001. In fact, it is the lowest. The total for 4 the year is the lowest. So I don’t have a clear trend. 5 That's why I went to the model. 6 CHAIR: 7 And on the last page of that testimony, 8 page 17, the question at line four, you say what is the 9 adjustment, the rate base, that you have calculated to 10 reflect the switch from LIFO to WACOG. And you say it 11 would be increased for the test year level by $1,795,000. 12 And the question I wrote at the time anyway was first is 13 what's proposed by the company and by the Staff. 14 A. The company, I believe, wants $25 million. The 15 Staff, I believe, wants $7 million. This adjustment is 16 really --- if you get away from all the models and just 17 look at what you're doing, they're saying we're 18 withdrawing 6.4 BCFs at $4. We're replacing it with gas 19 at some price. We don’t know the price. In our model, 20 it's $6. So you've got a $2 difference. So that is why 21 --- that's going to be their increase in inventory 22 volume. It'll either be $2, $3, $4. Then you multiply 23 it by the average, the 13-month average inventory. 24 They're definitely going to have an increase, 25 you know, because of the formula. As I described it,
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1 they're definitely going to have an increase in the asset 2 value. The question is ---. 3 CHAIR: 4 Because you're using the old, old 5 prices? 6 A. Yes, for years they've had LIFO storage 7 accounts, which has those --- it's much lower than ---. 8 CHAIR: 9 They'll take it off in layers, as I 10 recall. 11 A. Yes, and it's much lower than replacement. When 12 they replace it, they're definitely going to bump up. 13 The question is how much are they going to bump up? I 14 don’t think --- you know, $25 million is, for the reasons 15 I outlined in my testimony, is probably not likely.
16 CHAIR: 17 Why is the Staff number of $7 million 18 inappropriate then? I mean, what did they do wrong? Why 19 is the $1.795 million more believable than either of the 20 other two numbers? 21 A. Well, the $1.7 million is based on a projected 22 NYMEX price, and those prices are still fairly 23 believable. Then the next question is do you believe 24 that the average --- the quantities you've used, the 25 average inventory volume, is a believable number? Our
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1 average inventory volume is around three BCFs. In their 2 example, it was around four BCFs. Four BCFs is high. In 3 2008, the inventory was around --- I think it was 3.3 4 BCFs average for 12 months and 3.4 for 13 months. 5 So the BCFs for 2008 were definitely lower than 6 what they used in their example. And it's the volume 7 that's going to determine the value of the adjustment. 8 So of course, that's why I spent a lot of time looking at 9 volume. And the truth of the matter is the number's 10 probably somewhere between our number and the Staff's 11 number.
12 CHAIR: 13 You wouldn’t concede that it's 14 somewhere between all three of them though? 15 A. No. The $25 million is way too high. It's 16 based on $10 and $8. I think today's NYMEX the prices 17 are --- you know, they're certainly not $10 and $8. The 18 NYMEX prices we use, which of course we went forward to 19 March --- or to May 2010, when we'll actually be buying 20 this gas and ---. 21 CHAIR: 22 And they're all in the $6 range. 23 A. Yes. And they're all in the $6 range. So our 24 volume number could be a little low. I think our price 25 numbers are one of these three attributes. The NYMEX
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1 this week is down a little bit for those months. But I 2 think our price is good, volume may be slightly low. 3 CHAIR: 4 Thank you, ma'am. 5 A. Thank you. 6 ATTORNEY SADE: 7 I have one question on Redirect, if I 8 may. Ms. White, Chairman asked ---.
9 CHAIR: 10 Well, wait. Hold on just a second. 11 Did you have questions? 12 ATTORNEY MCDONALD: 13 I did but I can wait until after ---. 14 CHAIR: 15 Well, I mean, go ahead and ask yours 16 then. He can follow up and see if he has any on yours. 17 RECROSS EXAMINATION 18 BY ATTORNEY MCDONALD: 19 Q. With respect to the change in the inventory 20 balance as a result of switching from LIFO to WACOG, we 21 all agreed, do we not, that that change will cause an 22 increase in the inventory balance? 23 A. Yes. 24 Q. Hope asserts that adjustment 76 increases the 25 storage inventory balance from about $15.6 million,
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1 13-month test year --- no. It increases the test year 2 from $17.15 million to --- by $15 million to $32 million; 3 correct? 4 A. Yes, that is what they have in their testimony. 5 That's correct. 6 Q. Now, isn't a fundamental difference between what 7 the Staff did --- the Staff and CAD did on the one hand 8 and what Hope did on the other hand was that Staff and 9 CAD used projected purchases of gas out into 2010, the 10 prices of gas projected out into 2010? 11 A. We used the price of gas at the time that it 12 will experience a change in inventory, that's correct. 13 Q. Whereas Hope went through an analysis that went 14 back to when it first acquired storage and recalculated 15 storage inventory balances on the WACOG method instead of 16 the LIFO method, and that delta was its adjustment; isn't 17 that correct? 18 A. I believe Hope used the 13-month period ending 19 March 2008. And they used the prices in the volume from 20 that time. And as I've already discussed and my --- on 21 my page seven exhibit shows, those volumes are not 22 representative. 23 Q. Let's clear up the differences between the 24 parties on the adjustment, the rate base. Hope's 25 adjustment was $15 million, not $25 million; correct?
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1 A. Oh, thank you. Yes, you're correct. 2 Q. And Staff is whatever it is and CAD's is $1 3 million-something? 4 A. Yes. 5 ATTORNEY MCDONALD: 6 Okay. Leave it at that. 7 CHAIR: 8 Well, Mr. McDonald indicated in his 9 questions to you that at the time they, I guess, revalued 10 the inventory, they went back and attempted to use the 11 prices for gas that put --- that were used at the time 12 and put into the inventory; is that correct? 13 A. Yes. What they --- in their S-1 Exhibit, they 14 go back to '91 and re-price all their inventory purchases 15 and ---.
16 CHAIR: 17 But that's the various slices that are 18 in there, are they not? 19 A. Yes, that's what actually happened for the 20 13-month period ending in 2008 repacked under WACOG. 21 They took their LIFO inventory and repassed it using the 22 weighted average cost of gas. And so they used the 23 prices --- for example, they had two months at $10, not 24 quite $11, and then they have the other withdrawal 25 months, I believe, are at $8. And then the replacement
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1 gas was at $8. 2 CHAIR: 3 They got those prices from ---? 4 A. From actual --- those are actual. 5 CHAIR: 6 Actual as of what date? 7 A. I believe it's the historic costs, I'm guessing. 8 It's historic cost. But that --- if they had been using 9 WACOG in 2000 --- for the 13-month period ending March 10 2008, that would have been the variance because of the 11 large inventory that they had and because gas prices were 12 high.
13 CHAIR: 14 Okay. Thank you. Okay. You're 15 excused. Thank you. Who's the next witness? I believe 16 Paul Stewart? 17 ------18 PAUL P. STEWART, JR., HAVING FIRST BEEN DULY SWORN, 19 TESTIFIED AS FOLLOWS: 20 ------21 ATTORNEY BRASWELL: 22 For purposes of the record, I've given 23 two pieces of testimony to the court reporter and ask to 24 have them marked. I provided the Direct testimony 25 prepared by Paul Stewart, including 14 pages of testimony
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1 and 13 schedules. It's dated April 24th, 2009. And ask 2 to have that marked as Staff Exhibit 2A. And the revised 3 Direct testimony of Paul Stewart dated May 14th, 2009, 4 including 15 pages and also 13 schedules, and ask to have 5 that marked as Staff Exhibit 2B. 6 (Staff Exhibits 2A and 2B marked for 7 identification.) 8 CHAIR: 9 They'll be so marked.
10 ATTORNEY BRASWELL: 11 Thank you. 12 DIRECT EXAMINATION 13 BY ATTORNEY BRASWELL: 14 Q. Sir, would you please state your full name for 15 the record? 16 A. My name is Paul P. Stewart, Junior. 17 Q. Are you the same Paul Stewart who prefiled two 18 pieces of testimony in this matter? 19 A. Yes, I am. 20 Q. Do you have a copy of those there in front of 21 you? 22 A. I have a copy of the revised, but I didn’t bring 23 the original. 24 Q. We can provide that to you in case someone wants 25 to cross examine you on your original instead of your
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1 revised. What are your --- your job title and your 2 duties? 3 A. I am currently working under contract for the 4 utilities division for various casework and other areas 5 of working. As you can see, I did the class cost of 6 service in this case. I'm working on a Wheeling Electric 7 purchase power solution case. I'll be working on the 8 Mountaineer case doing working capital and perhaps 9 something else. So over a period of the last --- well, 10 since the end of February, I've been doing various pieces 11 of casework on a contract basis for the utilities 12 division. 13 Q. Prior to your contract duties for the Public 14 Service Commission, what was your employment? Where were 15 you employed and in what capacity? 16 A. I was employed by the Public Service Commission 17 in the utilities division, most recently as deputy 18 director of the utilities division. 19 Q. And for how long were you employed with the 20 Commission before you retired? 21 A. I began working for the agency in September of 22 1973. 23 Q. Do you have any corrections to your revised 24 testimony? 25 A. Yes, I saw a typo back here. On page 11, line
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1 13, the sentence should read excluding all cost-related 2 rather than coast. 3 Q. Do you have any other corrections? 4 A. Not that I'm aware of. 5 Q. If you were to provide this testimony today, 6 would you provide the same testimony? 7 A. Yes, I would. 8 ATTORNEY BRASWELL: 9 Subject to Cross Examination, Staff 10 asks to move Staff Exhibit 2A and 2B, and tenders the 11 witness for Cross Examination.
12 CHAIR: 13 All right. Mr. Patterson, I assume you 14 have no questions? 15 ATTORNEY PATTERSON: 16 No questions of this witness. 17 CHAIR: 18 All right. Mr. McDonald? 19 ATTORNEY MCDONALD: 20 Thank you, sir. 21 CROSS EXAMINATION 22 BY ATTORNEY MCDONALD: 23 Q. Good afternoon, Mr. Stewart. 24 A. Good afternoon. 25 Q. Congratulations on your retirement and
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1 re-employment. 2 A. Yes, thank you. Every day is almost like 3 Saturday except Sunday. 4 Q. How many years did you spend on the staff here 5 at the Commission? 6 A. Well, from '73 until 2008. That would be 35 7 years. 8 Q. Thirty-five (35) years. Let's talk about your 9 class cost of service study. Your peak day allocation 10 factors are based on actual three-day peak usage during 11 the test year; correct? 12 A. That is correct. 13 Q. Do you know what three days were included? 14 A. I believe it was two days in January, maybe 7th 15 to 8th, and February 11th of 2008. 16 Q. Did you have actually two different three-day 17 allocators, coincident peak and non-coincident peak? 18 A. Yes, I had tendered as date request to the 19 company and they had provided actual test year data. And 20 I subsequently made adjustments to those to reflect the 21 Staff more than normalization adjustments so that they 22 would be in sync. 23 Q. Do you know what the average heating degree days 24 were for this test year peak-day period? 25 A. I believe --- I remember what Mr. Gregrini's
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1 testimony was. I believe he said 66 days. I don’t have 2 an independent ---. 3 Q. Do you recall that the heating degree days for 4 the coincident three-day peak were 46 heating degree days 5 and 51 for the non-coincident days? 6 A. Okay. I'll accept that. 7 Q. Forty-six (46) and 51. 8 A. Forty-six (46) and 51. 9 Q. Do you recognize that Hope's peak day factors 10 are based on 77 heating degree days and reflect a 11 peak-day load that would occur under extreme weather 12 conditions? 13 A. Yes, yes. The Staff based it's on an adjustment 14 of the actual test year rather than in the model which 15 the company used, which assumed essentially worse-case 16 scenario in terms of the demand on the system. 17 Q. When a company, such as Hope, designs and builds 18 a pipeline system and incurs costs to do so, would it be 19 more appropriate to design the pipeline system to meet an 20 actual recent test year, three-day consecutive peak such 21 as 46 to 51 heating degree days or maximum flow 22 conditions such as 77 heating degree days, as used by 23 Hope? 24 A. Well, if it were rebuilding the system every 25 year, I think certainly we'd want to build it for what
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1 might we expect. A system that is back in place is going 2 to stand --- it's been there for some number of years and 3 was designed, for instance, for a different configuration 4 of customers than it has now and probably, if memory 5 serves, a much larger industrial load from, say, 20 years 6 ago than this case today. So the system as it was 7 designed over time wasn't necessarily designed to meet 8 the configuration of customers in the worse case for them 9 that could happen now. 10 Q. Mr. Gregorini noted in his Rebuttal that Staff's 11 allocation of transmission plan and related costs skipped 12 a step, which is to directly assign to the LCI direct 13 service class costs associated with specific transmission 14 mainlines and rights-of-ways solely dedicated to service 15 that class. Do you agree that that's what happened in 16 the Staff study? 17 A. Yes, I reviewed Mr. Gregorini's work paper but 18 decided that the Staff methodology would result in an 19 overall more reasonable end result. 20 Q. On A&G costs there is a dispute, as there is 21 between the company and the CAD; correct? 22 A. Yes. 23 Q. Staff allocated 48.6 percent of administrative 24 and general costs to the LCI classes, while those classes 25 comprise only 55 customers; is that true?
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1 A. Would you state that again, please? 2 Q. Staff's study allocated 48.6 percent of A&G 3 expenses to the LCI class while those classes comprise 4 only 55 customers; is that right? 5 A. Let me look at my study. I believe that may be 6 in reference to the original testimony that had an error 7 in that. 8 Q. Okay. Where in your --- 9 A. It would ---. 10 Q. --- revised testimony would this appear? 11 A. If you were to look on Schedule 3, sheet three 12 --- PPS One, Schedule 5, sheet three of three, you'll see 13 that total A&G, which was allocated to the LCIDS class, 14 which was $800,000, which was a little over ten percent. 15 Q. PPS One, Schedule 5, sheet three of three? 16 A. Yes. 17 Q. Total administrative and general? 18 A. Yes, I'm showing $800,000 to the LCIDS class out 19 of a total of $7 million. 20 Q. Yes, let's look at both LCIDS and LCID classes 21 together. 22 A. Even taking the two together, that's certainly 23 well less than 46.8 percent. What's $2 million out of $7 24 million? Perhaps 30 percent ---. 25 Q. I'm advised that ---- I'm using numbers from the
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1 original study. I apologize. Recognizing, as Mr. 2 Gregorini, did that the A&G cost allocation factor should 3 reflect some throughput, do you agree with Mr. Gregorini 4 that Hope's allocation factors for A&G expenses allocate 5 17 percent of A&G expenses on the basis of throughput? 6 A. I haven’t checked that, but I'll accept it. I'd 7 need to check. 8 Q. Staff's class cost of service study recognizes 9 the distinction between low pressure and high pressure 10 distribution mains; correct? 11 A. Yes, this Staff does and they count part of the 12 difference between, say, Staff and CAD and the company 13 and CAD, recognize the difference --- they're recognizing 14 the difference between the high and low that is 15 aggregated together will ultimately result in less 16 expense being allocated to the LCI classes. 17 Q. Staff's methodology with respect to this 18 distinction between low pressure and high pressure 19 distribution mains is the same method used by the 20 company? 21 A. Yes. 22 Q. And this methodology was used in Hope's last 23 litigated rate case in 1993; correct? 24 A. That's my understanding. 25 Q. Let's talk about rate normalization. A number
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1 of Commissions throughout the country have adopted 2 weather normalization or rate decoupling mechanisms for 3 gas utilities; correct? 4 A. That is correct. 5 Q. And we haven't here in West Virginia, but for a 6 pilot project involving some small utilities? 7 A. That is correct. 8 Q. Why do you suppose that there is a reluctance to 9 adopt a weather normalization procedure or a rate 10 decoupling for large utilities in West Virginia? 11 A. Well, I believe that Commission's intent at the 12 time that it approved the small gas company adjustment 13 was that it'd be a pilot project in order to see what 14 would happen on a smaller scale before it began doing 15 that for larger customers or larger companies. 16 As I've pointed out in my testimony, one of the 17 concerns that I think the Commission should take into 18 consideration and review before it would do such 19 mechanism for a larger investor-owned utility would be 20 the extent to which the weather normalization adjustment 21 reduced the variability --- revenue reduced the 22 variability of earnings and perhaps had an impact on 23 earnings returned to the extent that the Commission might 24 want to make some discrete adjustment to the return of an 25 award it would award on equity to take into account that
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1 the risk of the utility has been reduced by having made 2 --- by having committed this type of adjustment, which 3 would be putting a hold on the earnings from bad years to 4 some extent. 5 Because the way it worked to the extent that 6 earnings were lowered due to sales being low the test 7 year projection, the company could be made whole to some 8 extent to that. If you have, say, a four percent range, 9 then anything that the company sold --- any sales the 10 company lost that exceeded that four percent range, they 11 would be able to recoup from the customers. 12 And on the flip side, if it were a four percent 13 range higher or lower, if winter were much cooler than 14 normal and they sold a lot more gas, then they would have 15 to make it negative adjustment to the customer bills to 16 compensate them for the upper end of the range that they 17 collected. 18 Q. That program for the small gas utilities has 19 been in effect long enough, has it not, so that we have 20 seen some filings for summertime true up, or the 21 summertime adjustment to customer's bills based on this 22 program; is that right? 23 A. It's my recollection that only two of the 24 companies that were eligible to file did make a filing, 25 and they claimed no adjustment. This was an initial
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1 filing on their part. And I'd be interested to see what 2 it's going to look like in the next year when they've had 3 a year of experience and presumably would provide Staff 4 with data that shows what's going on with the system in 5 terms of sales and weather variability. At this point, 6 they've provided no data that can be analyzed. 7 Q. Well, they told you they're claiming no 8 adjustment; correct? 9 A. Right. So they're saying that their sales did 10 not vary outside of that range for the period. 11 Q. Right. Is there anything in that experience 12 that suggests that the program should not be applied to 13 larger utilities? 14 A. Well, I don’t think with a limited experience 15 you can draw any conclusion since apparently the one 16 winter they’ve gone through so far, is typical relative 17 to a rate case. Well, there hasn’t been a ---. And so 18 you really don’t have any pattern established to 19 determine the degree to which the weather normalization 20 adjustment is helping them or is disadvantaging the 21 customers at this point. 22 Q. How long do you think a big utility has to sit 23 back and watch this experience unfold before it should be 24 permitted to institute its own program? 25 A. I don’t know about time frame. But I would
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1 think that one of the things the company would need to do 2 would be to provide the Commission data which would 3 indicate have the --- had the program been in place in 4 the past year, what would have happened. One of the 5 problems I had with the company's filing is that it 6 didn’t really give me enough information that I'd be 7 inclined to try to do the modeling to determine what 8 would have happened had they had it in place.
9 ATTORNEY MCDONALD: 10 Thank you, Mr. Stewart. No further 11 questions. 12 CHAIR: 13 Mr. Feinberg? 14 ATTORNEY FEINBERG: 15 Thank you, Your Honor. 16 CROSS EXAMINATION 17 BY ATTORNEY FEINBERG: 18 Q. Mr. Stewart, I'll ask you a couple --- were you 19 here when I cross examined Mr. Harris? 20 A. I listened to some of your Cross Examination of 21 Mr. Harris over the internet with less than stellar 22 success of hearing it completely. So I heard part of it, 23 but I will say that I may not have caught all of it. 24 Q. Well, I was going to tell you I wanted to ask 25 you a few questions that are similar. If a cost of
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1 service study, such as yours, demonstrates that a large 2 volume of users are in a deficiency position, I'll use 3 that phrase, in your --- below system average rate of 4 return, which I think is what yours showed; right? 5 A. Yes. 6 Q. If one were to disproportionately apply a rate 7 increase to those large industrial customers that have 8 the --- that I've just mentioned, isn’t bypass, whether 9 it's bypass to an alternate fuel or bypass to an 10 interstate pipeline system, a possibility? 11 A. Well, if the increase were large enough, 12 certainly I guess that would be a possibility. But Staff 13 is not recommending any increase to its customers at all. 14 Q. Right. I understand. 15 A. So I don’t think we're posing a risk to them. 16 Q. Is that because you recognize the bypass 17 possibility or is that because Staff overall is 18 recommending a decrease? 19 A. I suppose if the numbers had shown something 20 that was really outrageous, you know, we would have had a 21 second look at it. For instance, the numbers I looked 22 --- that I had done originally, which had the error in 23 them, made the LCDI class see way underwater. But that 24 would be human error. So at this point, I didn’t see any 25 risk of they're being a bypass probative problem
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1 historically. 2 Q. So is your last piece of testimony the 3 difference is so small that you don’t think it warrants a 4 disproportionate percentage of the revenue requirement 5 going to the LCI class, provided that your Staff 6 recommended decrease turned into an increase? Now, I 7 asked that backwards so let me try again. If the Staff 8 decrease somehow would become the final order of this 9 Commission, an increase of the figure magnitude, would 10 your recommendation still be the same, which is that the 11 LCI classes get no disproportionate increase with the 12 other customer classes --- from the other customer 13 classes? 14 A. I think that would depend to some extent on the 15 degree of which a final decision shifted costs and 16 increase costs. It would be difficult for me to say 17 whether, you know, there's bright line where I say well, 18 we can do something differently than we've done now. 19 Q. Okay. Do you ---? 20 A. Normally I wouldn’t recommend a class get more 21 than double the increase of everybody else. But that’s 22 what we've done. 23 Q. To the extent something happened that caused the 24 bypass, do you agree that inevitably some fixed costs 25 have to picked up by other customers in the next rate
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1 case? 2 A. Yes. 3 ATTORNEY FEINBERG: 4 That's all I have, Your Honor. 5 CHAIR: 6 Okay. 7 CROSS EXAMINATION 8 BY ATTORNEY SADE: 9 Q. I just have one question, Mr. Stewart. Is your 10 revised testimony designed to replace the original 11 version of your testimony? 12 A. Yes, because the revised --- the original 13 testimony had errors in it that were due to --- I believe 14 were on my part. There was a footnote error in 15 calculating the factors. Plus the company gave me 16 revised data with regard to --- so I used interest from 17 my factors having to do with the system fees. So you 18 know, there were a couple different adjustments in usage. 19 So I would have had to have revised the testimony either 20 because I saw the error in the formula that had crept in 21 at the last minute or because the company revised its 22 response to my data request, which formed the basis for 23 several of the adjustments, several of the allocation 24 factors. 25 Q. So you're not asking the Commission to consider
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1 your original testimony? 2 A. No. 3 Q. It's all ---? 4 A. No, it had errors that had crept in because of 5 formula problems in my spreadsheet, and it has errors as 6 a result of the problem the company hadn't responded to 7 my data request. 8 ATTORNEY SADE: 9 Thank you. That's all I have. 10 REDIRECT EXAMINATION
11 BY ATTORNEY BRASWELL: 12 Q. Thank you. Mr. Stewart, I just want to clarify 13 a couple of things from Mr. McDonald's Cross Examination. 14 Is it your opinion the Commission has been resistant to 15 permitting rate decoupling or weather normalization for 16 larger gas utilities? 17 A. Yes, I don’t know that it's necessarily Hope's 18 proposal. It's just a matter of it --- to this point, 19 the Commission hasn’t been presented with any concrete 20 proposal, other than that one group of small utilities, 21 that has been subject to any sort of rigorous analysis. 22 Q. And let's clarify that. The pilot program for 23 the small gas utilities, the small gas utilities included 24 in that pilot program came in with a proposal for the 25 Commission and was a special filing by them for small gas
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1 utilities, is that ---? 2 A. Yes, it was for small gas utilities. The method 3 --- the formula that would be used to calculate the 4 process was similar to the one that had been in use in 5 Virginia that the expert witness who testified on behalf 6 weight of the calculations had worked with the Virginia 7 methodology for a number of years with Roanoke Gas. 8 Consequently, the Staff was able to get a wealth of 9 information about how that worked and decide what we 10 thought would work best for West Virginia based on the 11 proposal they presented. 12 Q. Your analysis of Hope's proposal for weather 13 normalization rate, is that based on solely Hope's size 14 or some things unique to its filing? 15 A. Well, I think that weather normalization 16 adjustment is in place in several other jurisdictions. 17 You know, this Commission needs to make a determination, 18 itself, as to whether it wants to institute something 19 like this, which does reduce the variability in the 20 company's earnings and basically guarantees to a greater 21 degree that it will reflect its margin costs. And in 22 this particular instance, there just wasn’t enough detail 23 to determine how this would work. 24 Q. Just for purposes of clarification, what kind of 25 information would you need to see that you didn’t see?
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1 A. Well, the proposal talked about making an 2 adjustment based on heating degree days, but you know, 3 there are several ways to look at them. And if the 4 company would look at all of the territory, then there 5 would be several different points at which the NOAA, 6 NOAA, National Oceanic and Atmospheric Administration, 7 has sites which measure heating degree days. And so one 8 decision one would have to make would be, you know, from 9 what points are you going to take the measurements, are 10 you going to collect them. And if the company calculates 11 its own, how are those done? There are some versions of 12 cooling degree days, I know they're interestingly 13 calculated, but I've seen them. 14 Q. Let me also ask you, because you've had some 15 questions about cost allocation factors between classes. 16 How important is it that you're able to determine the 17 heating degree day differential between classes? 18 A. In this type of analysis, it really isn’t since 19 we're essentially --- are you talking about for class 20 cost of service? 21 Q. No, for --- 22 A. Oh, I'm sorry. 23 Q. --- your weather normalization calculations. 24 A. For weather normalization, the heating degree 25 days will be applicable to everybody. But it needs to
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1 run, at least the methodologies that I've seen, need to 2 develop regression equations. And so you need to have 3 series of data that are giving you heating degree days as 4 recorded on, say, a monthly basis. And the usage for the 5 class is over those periods of time. So you can try to 6 use the equation to determine a line of best fit, if you 7 were able to determine the relationship between the 8 change in method and the change in customer consumption. 9 And that's going to vary from area to area to some extent 10 because of the equipment used by the customers over time 11 and the usage characteristics that, you know, is ---. 12 There are a lot of specific things you have to look at 13 that is brought along with territory of that typical 14 utility. In West Virginia, you don’t have a wide 15 variation between the, say, the Kanawha Valley and a 16 higher elevation such as Bluefield in terms of the 17 relationship between heating degree days and customer 18 consumption just because it's, you know, colder in one 19 area than another sometimes. 20 Q. Well, I'm curious for you to remind me of 21 something from the weather normalization case. Are all 22 classes of customers equally weather-sensitive? 23 A. No, obviously the customers in residential and 24 some of the small commercials that are using gas 25 particular --- and just especially for heating purposes
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1 are very weather-sensitive compared to those who have, 2 say, gas furnaces and even aren't using gas cooking. 3 Whereas a customer such as a bakery with a gas oven or 4 pizzeria, you may see a small drift in terms of increased 5 usage in the winter. But it's going to be --- would have 6 pretty much the same usage year round. 7 Q. In your opinion, would Hope Gas be precluded 8 from coming before the Commission sometime in the future 9 to present a Petition for Permission and Consent case --- 10 a Petition for Permission and Consent concerning weather 11 normalization or decoupling or some kind of alternate 12 design like that? 13 A. No. 14 Q. And your recommendations are specific to what 15 you saw presented in this case? 16 A. Yes.
17 ATTORNEY BRASWELL: 18 Thank you. No further questions. 19 CHAIR: 20 The weather normalization rulings that 21 we have made have --- well, first of all, have we had a 22 rate decoupling request? I'm not aware of any. 23 A. I've not seen things that has been called 24 decoupling. Now, to the extent that companies have asked 25 to increase the customer charge disproportionately that
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1 is a rate design that will have some of the effect of 2 decoupling, that it will shift a greater amount of the 3 fixed cost away from the variable commodity sales to the 4 ---. 5 CHAIR: 6 But I asked the witness from --- I 7 can't remember which one of the companies, what the 8 difference between weatherization --- normal --- 9 weatherization program and --- normalization of weather 10 and rate decoupling. And he gave a rather fixed 11 definition with a reference to the equity return being 12 frozen. And I don’t remember us getting any kind of 13 petition with respect to the rate decoupling. 14 A. No, I don’t think we've had any company come 15 before the Commission for a pure decoupling. A pure 16 decoupling would be one in which the company would 17 guarantee that it would be able to collect essentially 18 everything ---
19 CHAIR: 20 Right. 21 A. --- that is in the way of margin costs. So if 22 there's fixed costs that don’t vary with sales, you know, 23 it's just simply by an annual adjustment. And under that 24 circumstance, it should have a purchase gas adjustment 25 just as we have here. And then you have a pure rate
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1 decoupling. The only risk the company would have on a 2 rate case would be an inflation risk because so long as 3 inflation is stable, it would be guaranteed to be able to 4 earn the --- to collect the margin revenue projected in 5 the rate case. And the only problem it would have is if 6 they couldn’t control the cost of the fixed expenses. 7 CHAIR: 8 Okay. Well, we'll deal with the rate 9 decoupling when one comes before us. But with respect to 10 the weather normalization, my recollection of the order 11 we drafted was that we did it on a number basis. One, it 12 was a pilot. We agreed to that. Secondly, that there 13 was --- these were small, discrete areas. And third, 14 quite frankly that the impact was not likely to be 15 significant. And fourth, that they didn’t need --- or 16 they needed the cash flow or the assistance more than a 17 major company would. 18 A. Yes, I think that's true. And ---.
19 CHAIR: 20 Now, none of those seem to me to be a 21 reason not to do it for a major company. And I'm trying 22 to figure out what the --- I'm sort of on the company's 23 side on what may be on weather normalization. Why 24 wouldn’t we do it? What's the evil of it that we're 25 trying to avoid?
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1 A. I guess the evil of it is that in this instance, 2 the Commission would be approving the company engage in a 3 practice which hasn’t been properly analyzed. As I 4 stated earlier, the information that's provided would 5 allow Staff no opportunity to tell the Commission whether 6 it's going to have a big impact on their revenue 7 investments or whether it wouldn’t. 8 CHAIR: 9 Well, what if it was modeled in the 10 same way as the one from the small companies? I mean, I 11 realize you make the point that the weather changes 12 slightly. But I mean, this is the era of smart grids and 13 computers. We can work something out. And as you said, 14 you know, you can use some sort of regression analysis to 15 account for all that. What if you were simply to take 16 the one for the small utilities and scale up? I mean, 17 what does it do that we're so --- we're concerned about? 18 It seemed to make sense when we did it for the small 19 ones. I'm not sure why it's such a significant burden 20 for us to do it with the large ones. And I'm still 21 grappling with it. 22 A. Well, I guess the primary concern I would 23 articulate on the part of Staff is that at this point, 24 there aren’t data to analyze to determine and tell the 25 Commission what the impact would be.
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1 CHAIR: 2 Did we know what the impact would be 3 when we put the small one in? 4 A. There was sufficient data available that Staff 5 and CAD would be able to do some modeling and at least 6 get an idea of what the likely impacts would be. But in 7 this instance, I really don’t know how much money we're 8 talking about because the company did not provide 9 anything that would have permitted such an analysis.
10 CHAIR: 11 So part of your objection goes to the 12 lack of detail in the company's proposal, I take it? 13 A. Yes. 14 CHAIR: 15 But not to the concept of weather 16 normalization necessary for a large utility? 17 A. Not necessarily. And I stated that I would have 18 the reservation that I would want to know just how big an 19 impact it was going to have on earnings variability --- 20 on revenue variability and earnings variability, and 21 provide Commission an opportunity to determine if it was 22 going to be a big enough impact that it felt that perhaps 23 that should be a consideration when determining what a 24 proper return would be, since it's a program that would 25 lower the company's risk in terms of the collection of
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1 revenue and earning the ---. 2 CHAIR: 3 Is that a bad thing? 4 A. Not necessarily. But you would want to know --- 5 at least in my mind, I think that you would want to 6 satisfy yourself that you weren’t giving them an 7 unnecessarily high return when you lower the risk. 8 CHAIR: 9 We don’t do that very often, give them 10 unnecessarily high returns. The weather normalization 11 program that the small utilities have in effect basically 12 provides --- let's say that they miss it and its very, 13 very cold. And there's much --- you know, there's 14 significantly more weather that's colder than normal. 15 What happens when one of them reports? My recollection 16 is that the people that reported this time said we didn’t 17 go outside the bands and everything's okay. 18 A. Well, if there were a colder weather event year, 19 say, next winter than it was for that particular company 20 in its most recent test year, significantly colder, then 21 they would owe the customers a negative adjustment in the 22 spring. They would have to give money back.
23 CHAIR: 24 And is that a bad thing? 25 A. Not necessarily, no.
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1 CHAIR: 2 And if it was warmer than normal, what 3 would happen? 4 A. If it were unusually warm to a very significant 5 degree, then the customer would get a bill that would --- 6 I don’t know, $5, $10 higher then in June or April than 7 it otherwise would have been. 8 CHAIR: 9 But that's at a time when their usage 10 would be way down? 11 A. That's the benefit of doing it at that time. It 12 has less of an impact on the customers' ability to pay.
13 CHAIR: 14 So it's basically a way of looking at 15 the weather and trying to even out, if you will, the 16 payments? But it's not a way to take more money from the 17 ratepayers than they're otherwise required to pay, is it? 18 A. Well, if you put that into place, it would have 19 them pay a little bit more in --- toward the end of an 20 unusually warm weather winter and have them perhaps get a 21 little bonus, a little dividend, in the spring if it were 22 an unusually cold winter. 23 CHAIR: 24 But the net result is over the course 25 of a year, you want to come out --- the plan is to come
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1 out even, isn’t it? 2 A. Well, the plan is not to go outside the band 3 that --- the company did not --- in case of, say, a four 4 percent band, if the weather were three percent colder 5 than normal and the company collected --- and let's keep 6 to my simple --- three percent more revenue than you 7 anticipate, they wouldn’t owe the customers anything. 8 Conversely, if it were three percent in the other 9 direction, also there would --- a need to do any 10 adjustments. It's only when the variability of the 11 weather causes usage to go beyond those payments.
12 CHAIR: 13 Right. Okay. It's above or below, 14 then there's --- 15 A. Right. 16 CHAIR: 17 --- an adjustment. But the adjustment 18 is not one that permanently deprives, as I recall the 19 small one anyway, is not one that permanently deprives 20 the customer or permanently supplies the customer with an 21 amount of money that didn’t shoot up over time, isn’t it? 22 A. Well, it's reset every year basically. 23 CHAIR: 24 But is ---? 25 A. It's not like a 30-C where we carry a balance.
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1 CHAIR: 2 So there might be --- it's 3 theoretically possible they could be out if it's over the 4 --- above or below the band? 5 A. Yeah, if it's above or below the band, one of 6 the parties owes the other money. 7 CHAIR: 8 But they pay it? 9 A. Yes.
10 CHAIR: 11 Okay. Thank you. Other questions? 12 All right. Thank you, Mr. Stewart. We'll take about a 13 five or ten-minute break, and then the next witness. 14 SHORT BREAK TAKEN 15 ATTORNEY BRASWELL: 16 Thank you. I guess before we start, I 17 was wondering if after Staff witness, Eric deGruyter, we 18 could stay on the schedule and proceed tomorrow with 19 Staff witnesses David Pauley and Thomas Sprinkle. 20 CHAIR: 21 Well, if you insist. 22 ATTORNEY BRASWELL: 23 Yes, I do.
24 ATTORNEY MCDONALD: 25 No objection.
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1 CHAIR: 2 Actually we wanted to stay until 3 midnight and do it all, but only because you asked. 4 ATTORNEY BRASWELL: 5 Thank you. Staff calls Eric deGruyter. 6 ------7 ERIC DEGRUYTER, HAVING FIRST BEEN DULY SWORN, TESTIFIED 8 AS FOLLOWS: 9 ------10 DIRECT EXAMINATION
11 BY ATTORNEY BRASWELL: 12 Q. Good afternoon. Could you please state your 13 name for the record. 14 A. My name's Eric F. deGruyter. 15 BRIEF INTERRUPTION 16 BY ATTORNEY BRASWELL: 17 Q. Just to be clear, could you state your name for 18 the record, please? 19 A. Eric F. deGruyter. 20 Q. Are you the same Eric F. deGruyter who filed 21 seven pages of prefiled Direct testimony in this matter 22 on April 24th? 23 A. Yes. 24 Q. I've provided your seven pages of Direct 25 testimony to the court reporter. And I ask to have that
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1 exhibit marked as Staff Exhibit Number Three. 2 (Staff Exhibit Three marked for 3 identification.) 4 CHAIR: 5 It is so marked. 6 BY ATTORNEY BRASWELL: 7 Q. Mr. deGruyter, would you please state your 8 employer and your job title with your employer? 9 A. I'm a technical analyst III in the engineering 10 division of the Public Service Commission of West 11 Virginia. 12 Q. How long have you been employed with the 13 Commission and what are your job duties? 14 A. Twenty-eight (28) and a half years. And I work 15 primarily with natural gas utilities, both formal and 16 informal. And I also do a little bit of work with 17 depreciation. 18 Q. You're fairly familiar --- have you testified 19 before the Commission before in matters involving natural 20 gas utilities? 21 A. Yes, several times. 22 Q. Do you have any changes or revisions or 23 corrections to your testimony? 24 A. No. 25 Q. If you were to give your testimony today, would
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1 it be the same? 2 A. Yes. 3 ATTORNEY BRASWELL: 4 Subject to Cross Examination, Staff 5 moves Staff Exhibit Three and tenders Mr. deGruyter for 6 Cross Examination. 7 CHAIR: 8 Moved without objection. Mr. 9 Patterson, do you want to start? 10 CROSS EXAMINATION
11 BY ATTORNEY PATTERSON: 12 Q. Mr. deGruyter, I'm George Patterson. Were you 13 present here when Mr. Downey testified about the service 14 that IOGA would like to see the New Hope implement? 15 A. Yes, I was. 16 Q. Do you see major problems for the utility with 17 respect to that service? 18 A. In a physical sense, no. Operationally, no. 19 Q. Do you see any major impediment to that service? 20 A. There are some that have a point of view that it 21 would incur a cost to Hope that would be transferred to 22 other customers. I would think, and what I've heard 23 proposed by IOGA, is that IOGA members using that service 24 would pay that cost, whatever it might be. 25 ATTORNEY PATTERSON:
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1 Okay. Thank you. I have no further 2 questions. 3 CHAIR: 4 Mr. McDonald or ---? 5 ATTORNEY MCDONALD: 6 I'll follow Mr. Feinberg. 7 CHAIR: 8 Okay. That's fine. Mr. Feinberg?
9 ATTORNEY FEINBERG: 10 Thank you, Your Honor. 11 CROSS EXAMINATION 12 BY ATTORNEY FEINBERG: 13 Q. Hi, Mr. deGruyter. How are you? 14 A. Hi, Mr. Feinberg. I'm fine. 15 Q. I'm sure you've read Mr. Cyrus' Rebuttal. 16 A. Yeah. 17 Q. I don’t remember that you were in the courtroom 18 when he testified, but you probably could have been 19 listening upstairs; right? 20 A. I was one or the other place, yes. 21 Q. Looking at your operational recommendations 22 first, which of course there are six of them, pages six 23 and seven. Having read his testimony, are you now 24 satisfied that those six are either complied with or will 25 be?
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1 A. Essentially, yes. I think that there has been 2 testimony from other witnesses over the past few days 3 that have clarified some of the things that Mr. Cyrus 4 stated in his Rebuttal. If those clarifications are 5 incorporated into an order, I would be satisfied. 6 Q. Okay. Can you --- what clarifications are they? 7 Just so ---? 8 A. Well, there was a question, I believe, Mr. 9 Harris spoke to about the physical presence of upper 10 level management within West Virginia. I think there 11 were some questions from the Commission about whether 12 physical was necessary. If Staff and the Commission has 13 access to those management positions and if the proper 14 emphasis is put on the operations at Hope, proper 15 attention is given to Hope by those officials, then that 16 is the intent of my recommendation. I think Mr. Harris' 17 also. 18 I guess just as an example or a comment, some 19 utilities in West Virginia that have multi-state 20 operations, in my experience, the West Virginia pieces 21 have sometimes been treated as the ugly stepchild. And I 22 think that's where the recommendations are appointed as 23 Hope in West Virginia needs to have the full attention of 24 those upper level management personnel. 25 Q. But nothing you've heard has indicated to you
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1 that Steel River isn't trying to keep the present 2 operational management personnel and positions at least 3 currently in place and then improve on it; right? 4 A. I have not heard anything to that extent, no. 5 Q. How about from what you've heard, are you 6 satisfied with number five, commit to maintaining current 7 operational workforce levels? 8 A. Yes, I wish I would have said at least, but yes, 9 I'm satisfied with that. 10 Q. And you understand operational workforce levels 11 probably to be everything below the management level? 12 I'm just going to guess it's not distinguishable between 13 union and nonunion? 14 A. No. 15 Q. So both the union workforce and the nonunion 16 workforce that are at various levels are below 17 management? 18 A. Yes. 19 Q. And you certainly know its Steel River's intent 20 to --- not only intent, but it's part of the SPA that all 21 those people be employed? And it's also certainly their 22 intent that everybody accept? So you're okay with that? 23 A. That is my understanding, yes. 24 Q. Well, let's move to number six and then use it 25 to bridge over to the first part of your testimony, which
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1 is the accelerated steel --- bare steel --- accelerated 2 bare steel replacement program. Your number six, at 3 least, says commit the main --- commit the current main 4 --- commit to maintain the current pace? 5 A. Yes. 6 Q. Let me ask you a few questions about an 7 accelerated pace. Do you agree that there is, throughout 8 government agencies federally and otherwise, an 9 interested in replacing bare steel? 10 A. Yes. 11 Q. In fact, at least one federal agency says you 12 can't do it anymore, you can't put it in the ground 13 anymore; right? 14 A. That's correct. 15 Q. Is it true that when you replace bare steel, and 16 especially if you --- when you look at it from the big 17 picture standpoint, that line loss tends to decrease? 18 A. Yes. 19 Q. Is bare steel, in and of itself, frequently a 20 safety hazard? 21 A. It would pose a greater risk than --- types of 22 other pipes. 23 Q. That's a better way of saying it. Thank you. 24 The Commission's tight line safety division historically 25 has been a big supporter of replacing bare steel, isn’t
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1 that true? 2 A. That is one of their bigger concerns, yes, 3 correct. 4 Q. And they still have that same position, don’t 5 they, of get as much of it replaced as possible? 6 A. Yes, they do. And at the federal level, there 7 is today a bigger push, if you will, for that type of 8 program. 9 Q. Well, how do you personally feel about the idea 10 of an accelerated bare steel replacement program as a 11 general thing? And then I'll come to this one 12 specifically.
13 ATTORNEY SADE: 14 Your Honor, I'm going to object. I'm 15 not sure his personal view of something is relevant. 16 He's submitted testimony on behalf of the agency for whom 17 he works and I think that's what's important and 18 relevant. 19 ATTORNEY FEINBERG: 20 Well, as Mr. deGruyter testified, he 21 has been here for a long time and always in this 22 capacity. And I'm interested in his personal view of the 23 bare steel program.
24 ATTORNEY BRASWELL: 25 I'm not entirely sure that I'm
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1 interested in Mr. deGruyter's personal view on too many 2 things. However ---. 3 CHAIR: 4 Now, take that, Mr. deGruyter. 5 ATTORNEY BRASWELL: 6 But I don’t have any objection to 7 giving his limited engineering point of view as a 8 Commission Staff engineer if he doesn’t stray out of his 9 experience in and go into financial matters.
10 ATTORNEY FEINBERG: 11 Very good. I'll start again. 12 BY ATTORNEY FEINBERG: 13 Q. Mr. deGruyter, how would you like to give us 14 your opinion within the capacity of a Staff engineer 15 who's dealt with this for many, many years? 16 A. I'm generally in favor of it and would be 17 pleased to see as much effort put forth for that type of 18 program as possible. 19 Q. With respect to the issue of the rider in the 20 plan that Hope filed a petition for when they filed the 21 rate case, if I understand your testimony correctly, a 22 big concern was the fact that the Staff did not see a 23 plan that they could analyze. Is that a fair 24 characterization? If not, just amplify on it. 25 A. Yes, that's fair. That's my biggest concern.
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1 Q. Now, you've seen a description of the plan 2 certainly pretty detailed in Mr. McKeown's Rebuttal, 3 haven’t you? 4 A. Well, I saw some statements. And also in the 5 responses to Interrogatories, there was further 6 explanation of what would be the very first steps in 20 7 or so year plan, without a whole lot of details, a 8 general description of how the beginnings of that program 9 would start. 10 Q. Well, I'm going to bet you don’t think that the 11 statements would somehow be reviewing a plan that says 12 which ones would be replaced. You got a broader context 13 than that, I'm sure. So what kind of a plan is it that 14 you would like to see? 15 A. Well, I would like to see things, data showing 16 general age of the plant, leak history, incidents on 17 particular portions of the system. 18 Q. Is that the kind of information that you would 19 also --- that you would expect to receive when you were 20 reviewing the appropriateness of having already replaced, 21 that is when the review period came in to get approval 22 and to seek compensation? 23 A. That is, I suppose, the essence of my problem, 24 is that that would be after the fact, the pipe would be 25 in the ground and it would be spent. It can't be
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1 unspent. If for some reason, I discover something that I 2 believe would be improper or imprudent, it's a little too 3 late to say anything about it, other than to complain and 4 say it was improper. 5 Q. Then thinking about that plan from a perspective 6 sense or respective sense, how would you envision it 7 working? A kind of one-time plan or would it be an 8 annual update that would be brought to the Staff? Just 9 exactly what kind of plan would it take? 10 A. I would like to see an overall plan that would 11 cover the entire extent of the program. And then perhaps 12 working up into four or five or six pieces time-wise that 13 would add more detail of the program of what are we 14 wanting to do in the next three, four, five years. And 15 then as time goes on, probably for filing the remaining 16 years. I'm sure things will change as leaks occur and 17 things occur. 18 Q. Yeah, because none of this would step in the way 19 of emergency conditions or a heavy leak situation that 20 had to be repaired. Obviously, this would be talking 21 about, what I'll call, the more orderly but accelerated 22 plan to just do normal --- in the normal course, taking 23 out and replacing bare steel. 24 A. Yes, I wouldn’t preclude the precedent that we'd 25 need to take care of.
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1 Q. Well, is there any reason, if the Commission 2 chose to do so, why they couldn’t approve in this docket, 3 which includes a petition, a bare steel program, 4 accelerated bare steel program, subject to the first step 5 being the approval of a plan by the engineering division 6 or whoever it would be that would be approving the plan? 7 A. I wouldn’t see any particular problems with that 8 from an operations engineering point of view. I think 9 that another significant problem with the proposal is the 10 rate of recovery mechanism to which I don’t believe I was 11 speaking. 12 Q. Would it be your thought that it would be the 13 Staff's engineering division, more particularly you, I'll 14 say, that would be doing the review of these plants? 15 A. It would be I and --- mostly likely safety 16 section personnel.
17 ATTORNEY FEINBERG: 18 That's all I have, Your Honor, for now. 19 CHAIR: 20 All right. Mr. McDonald, do you have 21 any questions? 22 ATTORNEY MCDONALD: 23 Just a few, if I might follow up on Mr. 24 Feinberg's examination on the pipeline replacement 25 program.
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1 CROSS EXAMINATION 2 BY ATTORNEY MCDONALD: 3 Q. Hope has 1,400 miles of steel pipe in its system 4 according to Mr. McKeown. And it'd take 120 years to 5 replace those miles under the current schedule. And a 6 20-year program could be put in place under the company's 7 proposal. You agree that from an engineering perspective 8 and from the engineering Staff perspective of the 9 Commission that it would be better to replace this bare 10 steel pipeline sooner rather than later? 11 A. Engineers are kind of notorious for wanting 12 everything done right now. But I realize, and most 13 engineers, I think realize, that there are financial 14 constraints, rate concerns, practicality logistics. I'd 15 like to see a system with no bare steel. 16 Q. Good. Mr. Feinberg, I think, got you to agree 17 that you'd like to see the Staff be provided with 18 information about the age, the leak history, incident 19 history of the proposed pipes to be replaced. And that 20 the Staff might review that for approval; correct? 21 A. Yes. 22 Q. And are you aware that Mr. McKeown agreed to 23 provide that information to the Staff in advance of doing 24 the work? 25 A. If you're referring to a meeting in which we
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1 offered that type of information described and made aware 2 of that, yes. 3 Q. You said you were a bit concerned or you wanted 4 to know about the stages, maybe three or four stages, in 5 which the company might perform this work. That's 6 somewhat addressed, if not completely, in Mr. McKeown's 7 Rebuttal testimony on page three where he laid out what 8 he called a four-tier evaluation precedence. 9 A. I read his testimony, yes. 10 Q. Does that satisfy your concerns about knowing 11 about the sequence of work to be done? 12 A. In a general sense, yes. I'd like to see more 13 detail. 14 Q. Now, you did not want to talk about a, quote, 15 rate recovery problem. That's not in your area; correct? 16 A. That's correct. Another witness will address 17 that. 18 Q. Are you qualified to state what the problem is? 19 A. The problem is what was already stated by Mr. 20 Harris, that it's just not a normal rate-making process. 21 It's outside of the general rate case setting. And we 22 typically don’t want to do that. 23 Q. Very well. Mr. Feinberg took you through your 24 conditions. And I believe that you said that you were 25 satisfied that Steel River had committed to meet your
Sargent's Court Reporting Service, Inc. (814) 536-8908 203
1 conditions. But you said a few words need to be changed. 2 Did I get the sense of that right? Are you generally 3 satisfied with Steel River's commitments in response to 4 your conditions? 5 A. Yes. 6 ATTORNEY MCDONALD: 7 Nothing else. 8 CHAIR: 9 Oh, I'm sorry.
10 ATTORNEY SADE: 11 Thank you. 12 CROSS EXAMINATION 13 BY ATTORNEY SADE: 14 Q. Well, let me pick up where Mr. Feinberg just 15 left --- I'm sorry, Mr. McDonald just left off, Mr. 16 deGruyter. And by the way, good afternoon. Can you tell 17 me which of the conditions proposed by Mr. Kinney in his 18 CPK-8 in his Rebuttal testimony addresses your first 19 condition on page six of your testimony dealing with the 20 field tax customers? 21 ATTORNEY FEINBERG: 22 Maybe I should say that if I didn’t say 23 --- I thought I said Mr. Cyrus' Rebuttal, not Mr. 24 Kinney's Rebuttal, addressed these. But perhaps Mr. Sade 25 is going down this road for another reason. So I just
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1 want to make sure everybody understood it was the Cyrus 2 Rebuttal. 3 A. I guess the answer to your question is no. 4 BY ATTORNEY SADE: 5 Q. That's what I was looking for. And do you 6 believe that there is a condition in Mr. Cyrus' Rebuttal 7 testimony that addresses the field tax issue? 8 A. He addresses that issue but probably not to the 9 extent that I would like. 10 Q. Well, I know this from experience this issue is 11 kind of near and dear to your heart. And I'm just 12 wondering what it is about what BBIFNA has said in the 13 form of testimony, at least, that gives you comfort? 14 A. Well, the major part of the concern would be 15 satisfied by the language on page 11 of Mr. Cyrus' 16 Rebuttal testimony, line four, five, six. But there are 17 pieces missing that covers DTI and apparently there are 18 other third parties from which Hope services customers 19 that were not covered by that statement. 20 Q. Do you believe that the items he mentions are 21 the functional equivalent of what you call a perpetual 22 binding contract? 23 A. If you're referring to the term long-term 24 contract? 25 Q. Yes.
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1 A. That's not exactly perpetual. 2 Q. And are you familiar with the terms of the 3 Gathering Tap Agreement that was entered into or 4 presented in a case whose number I forget off the top of 5 my head, but the case involving a Gathering Tap 6 Agreement? 7 A. Yes, it was an '04 case. I don’t recall the 8 number. 9 Q. And between what parties was that agreement 10 struck? 11 A. As best I can recall, it would have been between 12 Hope and DTI. 13 Q. Do you remember the term of that contract? 14 A. I want to say ten years. 15 Q. It's my understanding that's not a perpetual 16 contract? 17 A. No, it's not. There are other commitments that 18 have been made concerning that issue. I suppose a rate 19 condition of those commitments or a re-rate condition of 20 those commitments would be helpful. 21 Q. And does the limited service agreement have any 22 implication for the provision of tap service off these 23 lines as well? 24 A. In terms of service being terminated --- 25 Q. Yes.
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1 A. --- when necessary? Yes, it does allow that. 2 But the permission of the Commission is also required in 3 those situations. 4 Q. Turning to the matter that Mr. Patterson of IOGA 5 raised with you. He asked you a question about the --- 6 IOGA's proposal and whether you had any objection or 7 whether you saw any physical problem, I guess, with what 8 IOGA had proposed. Do you remember that question? 9 A. Yes. 10 Q. Can you tell me, if a producer delivers gas into 11 a Hope distribution line that is in a bubble in Wetzel 12 County --- and I assume you know what I'm speaking about 13 when I talk about a bubble. But if a producer delivers 14 gas into a Hope line in such a bubble, can that gas be 15 delivered over Hope's lines to a customer in Clarksburg? 16 A. No. 17 Q. In fact, that requires the use of DTI 18 facilities, does it not? 19 A. Of that particular volume of gas, yes. 20 Q. And who pays for that transportation or delivery 21 of gas over that line? 22 A. Hope's customers. 23 Q. In the form of PGA rates? 24 A. Yes. 25 Q. Those PGA rates apply in any fashion to produce
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1 service represented by IOGA? 2 A. No. 3 Q. And if the distribution bubble receives gas from 4 DTI, does that necessarily mean that gas can flow the 5 opposite direction and be delivered to DTI? 6 A. Not necessarily, no. 7 ATTORNEY SADE: 8 That's all I have. Thank you.
9 CHAIR: 10 Is that it? Well, I was going to ask 11 some and then you --- you can go first. Go ahead. 12 ATTORNEY BRASWELL: 13 No. I'll certainly defer. Thank you. 14 CHAIR: 15 Mr. deGruyter, how familiar are you 16 with the bare steel or accelerated bare steel replacement 17 programs around the country? I understand there's 15 to 18 25 of them? 19 A. I don’t know a whole lot of specifics. I do 20 know that they're going on. And I do know that the 21 Office of Pipeline Safety is interested in seeing the 22 replacement accelerated. There's a lot of older pipes, 23 it's aging, so it's a hundred years old. It gets older 24 every day. 25 CHAIR:
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1 Well, I was just trying to get some 2 appreciation for the variation among the plants, if you 3 had any thoughts with respect to that. 4 A. I don’t know a whole lot about what other states 5 are doing. I do know that there is a program in Ohio 6 that was recently approved by the PUC. Other than that, 7 I don’t know any detail about what other states are 8 doing.
9 CHAIR: 10 Do they contain within, to your 11 knowledge, an equity allowance? 12 A. In terms of ---? 13 CHAIR: 14 Allowing not only the recovery of the 15 cost but somehow on the return or the investment? 16 A. Well, I believe that it does. And I believe 17 that that, in my view, would be automatic --- if capital 18 was added to rate base, then there would be an automatic 19 return on the rate base. 20 CHAIR: 21 Well, the water company would be 22 pleased to hear that. I think theirs is just a return of 23 cost up until the time it goes into the plant. I'm just 24 wondering if the thought had been given to a program that 25 sort of like, I'm trying to think, separates, for
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1 instance, where you verify the actual cost of 2 construction and it's allowed in as a surcharge or a step 3 increase of some sort. Whether you're familiar with any 4 line replacement, bare steel replacement or line 5 replacement programs that would allow some sort of an 6 increment to either as a part of a rate case or between 7 rate cases but not necessarily have a capital --- a 8 return capital component to it? 9 A. I don’t know the details of any such programs.
10 CHAIR: 11 I was looking at your conditions. And 12 I used to draft some of these things. And some of the 13 words you used just naturally jumped out at me. You talk 14 about committing to seeking Staff advice prior to closing 15 or relocating any customer service centers in the state. 16 What do you mean by seeking their advice? Are you saying 17 they're to advise you or are you saying you need the 18 consent or ---? 19 A. I don’t think that I'm the one that can give the 20 consent. I would just simply like to be made aware of 21 it, have a discussion with the company about the need for 22 it and perhaps convince them that it is not necessary or 23 that there's an alternative.
24 CHAIR: 25 So by advice ---.
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1 A. So I don’t wake up one morning and find all the 2 offices closed. 3 CHAIR: 4 So you mean more of a notice, but less 5 than consent, I take it? 6 A. I may be able to persuade them to seek consent. 7 CHAIR: 8 In your item four, given the Supreme 9 Court has not directed us to take over as the Board of 10 Directors and commit to the retention of operational 11 management personnel. Are you talking about positions? 12 Because it seems to say that the positions follows after 13 that. Are you saying that they will employ certain 14 people? And you don’t have a timeline on it as far as I 15 can tell. I mean, what --- indefinitely or at closing? 16 Or what do you have in mind? 17 A. Well, my preference would be indefinitely, that 18 the positions at least would continue to exist.
19 CHAIR: 20 Thank you, sir. 21 ATTORNEY BRASWELL: 22 Thank you. 23 REDIRECT EXAMINATION
24 BY ATTORNEY BRASWELL: 25 Q. Just to clarify, Mr. deGruyter, in your
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1 experience with the Commission, do you have any 2 experience with a bare steel replacement program for 3 Union Gas --- Union Oil & Gas? 4 A. That particular situation that I think you're 5 referring to didn’t have to do with bare steel, per se. 6 It had to do with inspection and upgrades, repairs, to 7 road crossings on a high pressure transportation lines. 8 Q. And just briefly describe were there safety 9 issues involved in that matter. 10 A. Yes, it was highly recommended by Pipeline 11 Safety. 12 Q. And in your experience with the Commission, were 13 you also familiar with a bare steel replacement program 14 for West Virginia Power & Gas? 15 A. Power & Gas Service, yes. 16 Q. And just briefly describe your understanding of 17 that utility's unaccounted for gas loss. 18 A. My recollection is that it was somewhat above 19 the allowable limit as prescribed by Rule 30-C, which was 20 probably the major factor in the company proposing the 21 program, and they had a fairly accelerated pace. 22 Q. What kind of plan did that utility submit in 23 conjunction with its bare steel replacement program? 24 A. The case was, I believe, a Petition for Consent 25 to engage in that program. Along with the petition was
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1 an outside engineering firm's assessment of their system 2 with a detailed, I believe, seven-year plan with cost and 3 a great deal of detail on the various projects that would 4 be accomplished during that program. 5 Q. Did West Virginia Power & Gas replace all of 6 their steel or do they still have some in the ground? 7 And you don’t have to answer yes or no. You can just 8 describe the --- way you please. 9 A. They do have remaining bare steel. There is 10 some that was relatively new and not in poor condition, 11 that still had life to it and was not fully depreciated. 12 Well, I guess that answers your question. 13 Q. And what's your opinion on Hope's unaccounted 14 for gas loss? 15 A. It is relatively low. Certainly well below the 16 limits of unaccounted for, for a company that size. And 17 below what is an informal threshold that triggers the 18 interest of Gas --- Pipeline Safety.
19 ATTORNEY BRASWELL: 20 Thank you. No further questions. 21 CHAIR: 22 I take it from your conditions two and 23 four, at least, that you don’t seem to have to --- other 24 than the dispute you had with respect to the connections 25 on the gathering lines in the past, you don’t seem to
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1 have too much problem with respect to Hope's operations 2 at the moment? 3 A. No, they're not a problem company from my point 4 of view. 5 CHAIR: 6 Anything further? Thank you, Mr. 7 Gruyter, you're excused. All right. We're going to 8 adjourn. We will reconvene at nine o'clock tomorrow 9 morning. I'd like to try to go straight through and get 10 those two witnesses scheduled for tomorrow on and off. 11 If we have to go into the afternoon, we will. But 12 sharpen your Cross, and we'll see where we go. Thank 13 you. 14 15 * * * * * * * * 16 HEARING CONCLUDED AT 3:43 P.M. 17 * * * * * * * * 18 19 20 21 22 23 24 25
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1 2 3 CERTIFICATE 4 5 I hereby certify, as the stenographic reporter, 6 that the foregoing proceedings were taken 7 stenographically by me, and thereafter reduced to 8 typewriting by me or under my direction; and that this 9 transcript is a true and accurate record to the best of 10 my ability. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Sargent's Court Reporting Service, Inc. (814) 536-8908 HOPE GAS, INC, clba DOMINITN HCPË DOMINION R.ESOURCES, Ih] C: .LLC PEOPLES HOPE GAS CÛh4ÌIANTES, C.ASE Nû. û8- i 783-G-,427 CASE NO. Û8-17ÔI-G.PC
DIRECT TESTIN{ONY
FREPAREÐ BY STEVI]T{ TV{. KAZ
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:åJ i2 i5 ON BEHALF OF THE STA}..-F OF THE ; ':r -tú'?J ...t..,i PUBLIC SERVICE COI\{h4ISSION OF WEST vlRcn lftf ii I Þe.: 1l i--t Ír. J )-d, (:f, ra', l'1 fc'ä * ¡F ¡F å. s:i -:.: vr=:-. l'Ï (f.m '*D i--' April 24,2009 O = 3 -J =
** E'rrr'''- 201 Brooks Street, P. O. Bc.x 812, Charlestorr, WV 25323 Jrót èl*¿- lz6 l=--=;-b€l J)-2 CASE NIIMBERS: 08-1783 -G-42T &.08-1761-c-PC
DIRECT TESTIMONY OF: STEVENT M.KAZ PAGE
NIJMBER: 1
l_ a. WOULD YOU STATE YOUR NAME, BUSTNESS ADDRESS AND
2 OCCUPATION?
3 -:;';: 4., ft'.-' My name is Steven M. Kaz and my business address is P. O. Box 812, ' '' ;r'. r: - 5 Charleston, West Virginia 25323. I am a Utilities Analyst Supervisor for the
6 Utilities Division of the Public Service Commission of West Virginia.
7 I a. PLEASE STATE YOTJR EDUCATIONAL AND PROFESSIONAL
9 BACKGROUND.
l_0
11 A. I attended the University of Charleston and attained a Bachelor of Science Degree
L2 in Business Administration in May of 1990 and a Master of Business
t_3 Administration in December of L997 fromthe Marshall Graduate College. I have
t4 been employed by the Public Service Commission as a Utilities Analyst since
t_5 January 1991. I attended the 26Th Annual Eastern Utility Rate School in October
1,6 1998. I1 18 a. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 19
20 A. The purpose of my testimony is to present Staffs reconlmendation as to a fair rate
21, of return for Hope Gas, Inc., dba Dominion Hope ("Hope" or "Company"). Hope
zz is a wholly owned subsidiary of Dominion Resources, Inc. I will also address
23 issues that I am responsible for in this proceeding. In addition to my testimony
24 and exhibits here, I will also be providing confidential testimony evaluating the CASE NUMBERS: 08-1783-G-42T & 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M.KAZ PAGE NIIMBER: 2
I debt and equity costs proposed for Hope Gas, Inc., dba Dominion Hope (o'Hope"
2 or "Company) after the sale to Peoples Hope Gas Companies (PH Gas), an
3 indirect subsidiary of Babcock & Brown Infrastructure Fund North America, LP
4 (BBIFNA) under separate confidential cover due to a pending request(s) for
5 confidential treatment.
6
7
B A. HOW DOES STAFF GENERALLY DEFINE A FAIR RATE OF RETURN
9 FOR RATE.MAKING PURPOSES? t-0
11 A. Generally, the cost of capital represents a fair rate of return that will not only pay
T2 for debt but will also compensate equity owners commensurate with the returns t_3 on investments of comparable risk. This fair rate of return will enable the
1,4 Company to attract required capital.
15 t6 a. WHAT APPROACH HAS STAFF USED TO DETERMINE THE COST OF a7 CAPITAL?
1B
1_9 A. Staff has used the weighted cost of capital approach which weighs the cost of
20 each type of capital by its proportion to the total capital structure. The sum of the
21- weighted cost is the return required to service that particular capital structure.
22
23 a. PLEASE EXPLAIN APPENDIX SK-l, SCHEDULE 1. 24 CASE NUMBERS: 08-1783 -G-42T &.08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 3
1 A. Schedule I shows the capital structure and the cost of debt and equity for Hope
2 and Dominion Resources, Inc. At March 3!, 2008, Hopes' capital structure
3 consisted of 18.10% short-term debt,40.47o/o\ong-term debt, and 41.43% equity.
4 As previously stated, Hope is a wholly owned subsidiary of Dominion Resources,
5 Inc. At March 31, 2008, Dominion Resources' capital structure consisted of
6 6.05% short-term debt, 54.12% long-term debt, l.0l% preferred stock, and
1 38.}2%equity. During the year, Dominion Resources' average cost of short-term
I debt was 4.g3%. The embedded cost of long-term debt was 6.61%o.
9 Staff is presenting two capital structures in its recoÍtmendation. The first
10 capital structure reflects Hope's capital structure should the Commission decide t_1 not to approve the purchase. It is based on its capital structure as of March 31,
I2 2008, adjusted to reflect the level of short-term debt at the average balance t_3 outstanding during the test year. Staffs recommended capital structure for Hope
T4 reflects Hope's March 31, 2008 capital structure as adjusted to the average level
15 of short-term debt outstanding during the year. Staff is recommending that the
L6 cost of short-term debt be reflected at 3.32%o and the cost of long-term debt be
I1 reflected at 5.82o/o. Staffs short-term interest expense calculation is shown on l-8 Schedule 1, Sheet2.
1,9 The second capital structure is based on the requested capital structure
20 under Peoples Hope Gas (PH Gas) ownership will be presented under separate
27 confidential cover due to a pending request(s) for confidential treatment.
¿z ¿3 A. PREVIOUSLY, STAFF HAS USED CONSOLIDATED NATURAL GAS 24 COMPANY AS A PROXY IN RECOMMENDING A CAPITAL CASE NUMBERS: 08-1783 -G-42T &.08-1761-G-PC
DIR.ECT TESTIMONY OF: STEVEN M. KAZ .PAGE : NUMBER: 4
1 STRUCTTJRE FOR HOPE. \ryHY HAS STAFF NOT USED DOMINION
z RESOI.IRCES AS A PROXY FOR TTS RECOMMENDATION IN THIS
3 CASE?
4
5 A. Prior to the July 2007 merger of Dominion Resources and Consolidated Natural
o Gas Company (Consolidated). Hope was a wholly owned subsidiary of
7 Consolidated, which \Ã/as owned by Dominion Resources. Consolidated issued
I all of the public debt and lends the proceeds to its subsidiaries, including Hope.
9 Consolidated's primary business was the production, transportation and l-0 distribution of natural gas. Staff believes that Consolidated business risk closely t- t- represented that of Hope. Dominion Resources, while involved in gas, is a much
L2 more diverse company with holdings in electric generation, transmittal, and
13 distribution as well as venture capital activities. A majority of Dominion
I4 Resources revenues come from electric and unregulated activities.
1_5 t6 a. \ryHAT IS STAFF'S RECOMMENDATION CONCERNING THE COST I1 OF SHORT.TERM DEBT?
1_8
19 A. Staff s recommended capital structure includes the average amount of short-term 20 debt outstanding during the test year. Based on the most recent months of
2I January, February and March 2009 the effective going-level short-term interest zz rate is 1.10%. Using the most recent cost information available is consistent with
23 adjusting test year expenses for known and measurable changes.
24 CASE NUMBERS: 08-1783 -c-42T & 08-1761-c-PC
DIRECT TESTIMONY OF:.STEVEN M. KAZ PAGE NUMBER:'5
t_ a. WHAT IS STAFF'S RECOMMEI{DATION CONCERNING THE COST
¿ OF LONG.TERM DEBT?
3
4 A. Staffs recommended capital structure includes the cost of long-term debt at
5 592%. Staff determined its recomrnendation based on the embedded cost of
6 long-term debt with the adjusted the cost of a $40,000,000 issuance. In its
1 calculations, Staff substituted the available 5.I9o/o debt. In 2004, Hope file a
8 petition for consent and approval for a financing transaction with CNG (Case No.
9 04-0708-G-PC). The petition proposed that Hope assume $40,000,000 of debt
l_0 held by CNG, issued in 2001and due for repayment in 20ll.In exchange for the
t_1 debt, Hope would receive S40,000,000 to retire its own short-term debt. The debt
I2 carries an interest rate of 6.97% per annum. Hopes proposed transaction was as a
13 push down of debt based on a weighting that reflects first the $500 million
T4 issuance in 2001 with an effective yield of 6.970/o and then a portion of a $200
l_5 million issuance in 2003 with an effective yield of 5.19%o. Staff s concern was
I6 that Hope would barrow money in 2003 based on 2001's higher interest rate, as
I7 well as, that CNG was pushing down its more expensive debt unto a regulated
1B company and the ratepayers would ultimately be harmed. Hope argued higher
T9 interest rates would not harm customers if the parent company's (CNG) capital
20 structure and cost of debt are used for ratemaking purposes. CNG no longer
2t exists and Staff believes it is appropriate to use Hope's capital structure for rate 22 making pu{poses. Staff notes the current parent company's embedded cost of 23 long-term debt is 5.75%. The Commission Order approved Hope's petition for
24 consent and approval of the financing transaction without approving the specific CASE NUMBERS: 08-1783-G-42T & 08-1761-G-PC
DIRECT TESTTMONY OF: STEVEN M.KAZ PAGE NUMBER: 6
1 terms and conditions.
2
3 A. HOW DID STAFF DETERMINE A REASONABLE RETURN ON 4 coMMoN EQUTTY FOR HOPE?
5
6 A. Staff has used three approaches. Two of the approaches measure investors'
7 expectation of return on equity. Specifically, these two market oriented
B methodologies are a version of the Discounted Cash Flow (DCF) and the Capital
9 Asset Pricing Model (CAPM). The third approach checks the reasonableness of 10 the calculated cost of equity indirectly by determining the overall return required
11 to provide reasonable interest coverage and internally generated cash flow.
L2
1_3 A. HAS STAFF PREPARED SCHEDULES THAT REFLECT THESE I4 ANALYSES? l_5
L6 A. Yes. Schedules in Appendix SK-1 reflect these analyses. Schedule 2 reflects
1,7 Discounted Cash Flow Calculations, Schedule 3 reflects Capital Asset Pricing 18 Model calculations and Schedule 4 reflects averaging the two methodologies for
L9 each of the companies in the sample group. Schedule 5 reflects retention rates,
20 interest coverages, construction funds internally generated. Schedule 6 shows the
21, end results of Staffs recommended return.
22 23 A. PLEASE DESCRTBE IN GENERAL TERMS THE DISCOUNTED CASH 24 FLOW APPROACH TO DETERMINING THE COST OF EQUITY. CASE NUMBERS: 08-1783 -G-42T &.08-1761.-G-PC
DIRECT TESTIMONY OF: STEVE}{ M. KAZ PAGE NUMBER:7
t- A. The Discounted Cash Flow method has been presented as a method of
z determining the cost of equity capital for utilities in rate cases since the mid-60's.
3 It is derived from the basic financial concept that the market price of a stock
4 reflects the present value of the future cash flow stream that investors expect from '5 that investment. The cash flows are derived from dividends and any capital gain
6 from future sale of the security. The discount rate that equates the stock price
7 with the expected cash flow stream is the cost of capital and is represented by the
B formula:
9 K:D/P+G
10 Where:
11- K: Investor's discount rate, or I2 expected return on equity
13 D : Annual dividend amount t4 P : Market price of the share of stock l_5 G : Expected growth rate in the future
16 t7 a. PLEASE EXPLAIN APPENDIX SK-l, SCHEDULE 2. l_8
L9 A. Schedule 2 reflects DCF calculations for a sample group of nine investor-owned
20 gas utilities. The sample group consists of AGL Resources, Inc., Atmos Energy
2L Corporation, Laclede Group, Inc., NICOR, Inc., Northwest Natural Gas zz Company, Piedmont Natural Gas Company, Inc., South Jersey Indushies, Inc.,
23 Southwest Gas Corporation and WGL Holdings, Inc. The companies in the
24 sample group are all actively traded and reflected in Value Line under the Natural CASE NUMBERS: 08-1783-G-42T & 08-1761-c-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER:8
t- Gas Distribution Industry. All the companies had greater than fifty-percent (50%)
2 of their revenues derived from gas distribution operations, and at least a BBB- S
3 & P Bond rating as reported in the March 2009 AtlS Monthly lltility Report.
4 The prices in column (1) used to determine yields are based on the average daily
5 closing prices per share for the 13 weeks ended April 10, 2009. The dividends
6 used in column (2) are estimates of expected dividends over the next twelve
7 months per Value Line Investment Survei, April 17,2009. The yields range from
I a low of 3.35%o for South Jersey Industries, Inc. to a high of 5.12o/o for NICOR
9 Inc. The average yield ís 4.55o/o. Growth rates found in column (4) are the
1-0 compound dividend growth rates required for the current dividend to reach Value l_ 1_ Line's single value estimates of the dividend for the 2012-2014 period. Computed
L2 growth rates range from a low of no growth for NICOR Inc. to a high of 5.88% l_3 for Northwest Natural Gas Company. with an average of 3.l1Yo. The resulting
L4 indicated returns on equity range from a low of 5.73% for NICOR Inc. to a high
1_5 of 9.71o/o forNorthwestNatural Gas Company. The averageisT.660/o.
16 L7 A. PLEASE PROVTDE A BRIEF DESCRIPTION OF THE CAPITAL ASSET l-8 PRICING MODEL WHICH IS USED ON YOUR APPENDIX SK-l.,
T9 SCHEDULE 3.
20
2L A. The underlying theory of the CAPM stems from portfolio analysis. One of its ¿z primary theoretical appeals is that it relates both risk and return in a single
23 measure of required return on equity. The basic principle is that the investor's
24 expected return is directly related to the level of risk assumed. This risk is CASE NIUMBERS: 08-1783-G-42T & 08-1761-G-PC .PAGE DIRECT TESTIMONY OF: STEVEN M.KAZ NUMBER: 9
1 represented by statistical measures, such as variance and standard deviation of
z market returns, which express volatility. Beta is the risk measure that expresses
3 the volatility of a particular security compared to "the market". A security with a
4 beta coefficient of 0.8 would be less risky than the market in that its price would,
5 in general, rise or fall less rapidly than "the market". Conversely, a security with
6 abeta coefficient of 1.2 would, in general, rise or fall in value more rapidly than
7 "the market".
I A statement of the expected return for a given security based on its
9 riskiness is provided by a mathematical expression of the "capital market" line. t-0 The "capital market" line reflects the trade off between risk and return as drawn
11 from the points of the risk-free asset tangent and the expected return on "the
T2 markett'.
13 The basic CAPM equation for estimating a company's cost of equity is as I4 follows: l-5 Ç: Rf * Þr,(k*-R¡), l_6 Where: L7 Ç: Company's required return on equity l_8 R¡: rate of return on risk free securities L9 0*: the stock's beta coefficient as estimated 20 by investors
2T k-: expected rate of return on "the market"
22
23 a. PLEASE EXPLATN APPE¡{DIX SK-l, SCHEDULE 3. 24 CASE NLIN4BERS : 08- 1 783 -G -42T &, 08-17 6I-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 10
1 A. Schedule 3 reflects CAPM calculations for the sample group.
z The expected return component of 7.9% represents the difference between
3 the arithmetic mean of return on common stocks, as measured by the S&P 500
4 Composite Index, and treasury bills for the period of 1926-2008 as published in
5 Stocks. Bonds, Bills and Inflation Valuation Edition 2009 Yearbook. The beta, or
6 risk, coefficients, as reported by Value Line Investment Surve)¡, April I7,2009,
7 for the nine companies range from a low of .60 to a high of .75 resulting in a
I premium, or risk adjusted, return component ranging from a low of 4.74o/o to a
9 high of 5.93%.
10 The risk-free component is calculated as the average of three measures for 11 the risk-free return based on the l3-week Treasury Bill. The first, .220%
I2 represents the average end of week yield for the 13 weeks ending April 10, 2009.
13 The second, .500yo, represents the projected rate for the year 2010 by Value Line
L4 Investment Survey as of February 20, 2009. The third, .6000/0 represents the
1-5 projected rate for the four quarters ending the fourth quarter 2010 per Consensus
1,6 Forecasts, Blue Chip Financial Forecasts, April 1,2009. I7 18 A. WIIY \ryAS THE I.3.WEEK TREASURY BILL USED AS THE RISK.FREE L9 IN-VESTMENT RATHER THAN 2O .YEAR TREASURY BONDS OR 20 SOME OTHER MEASTJRE,?
2L
22 A. The l3-week Treasury bill was used because it is nearly as risk-free an investment
23 as is available. The risk of default is minimal since it is guaranteed by the U.S. 24 Government. The short period to maturity also lessens the investor's risk of CASE NLMBERS: 08-1783-G-42T & 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M.KAZ PAGE NUMBER: 11
1 adverse changes in interest rates compared with a much longer maturity period.
2 Eugene Brigham 1 states:
3 There is one security that is free of most risks - a U.S. Treasury bill (T- 4 bill), which is a short-term security issued by the lJ.S. Government.
5 Treasury bonds (T-bonds), which are longer-term govemment securities,
6 are free of default and liquidity risks, but t-bonds are exposed to some risks
'7 due changes in the general level of interest rates.
I Staff believes that 13 week T-bills are appropriate because the Company is not
9 locking rates into a twenty year commitment. Should the Company's financial
10 position deteriorate it is free to file for a rate increase. l-1
L2 a. AND WHAT RETURNS ARE INDICATED FOR THE SAMPLE GROUP?
1_3
1,4 A. Using the average risk free component of .440o/o, the return for the sample group l-5 range from a low of 5.18% to a high of 6.37% with the average being 5.7r%.
L6
L7 a. PLEASE EXPLAIN APPENDIX SK-l, SCHEDULE 4? 18
1,9 A. Schedule 4 shows the average of the DCF and CAPM calculations for each of the
20 companies in the sample group. For the sample group the averages range from a
2t low of 5.90% for Laclede Group, Inc. to a high of 7.47Yo for Southwest Gas zz Corporation. The average 6.72%.
tEugene F. Brigham, Financial Manaqement Theory and Practice, Sixth Edition, P.79 CASE NIUMBERS: 08-1783 -G-42T & 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 12
l_ a. PLEASE INDICATE TTTE IMPACT OF THE CURRENT FINANCIAL
2 CRISIS HAS HAD ON TIIE INPUTS USED IN CALCT]LATING STAFF'S
3 RECOMMENDED RETURN ON EQUITY.
4
5 A. The yield on the l3-week Treasury bill (used in Staff s CAPM calculation) has
6 fallen to historic lows as investors looked for a safe haven in the worst financial
7 crisis since the Great Depression. In December 2008, the Treasury sold l3-week
8 Treasury bills at a discount rate of 0.005 percent, the lowest since the securities
9 started to be auctioned in 1929. This low rate guaranteed investors would lose to
10 inflation but they felt more comfortable losing some money to the Government t_ 1_ than investing in equity.
T2 Staff also notes in the market premium or expected return component of the l_3 CAPM has dropped noticeably. According to Stocks. Bonds, Bills and Inflation l4 Valuation Edition 2009 Yearbook, the arithmetic mean of return on common l-5 stocks, as measured by the S&P 500 Composite Index has fallen from 12.3o/o to
L6 ll.7yo, a decline of 60 basis points since the 2008 publication.
1-7 l_8 a. PLEASE EXPLAIN APPENDIX SK-I., SCHEDULE 5.
1,9
20 A. Schedule 5 is used to provide an objective analysis of the reasonable range of
2T returns derived from the market oriented approaches, by which, the 22 reasonableness within the range can be tested for further refinement. It is difficult
23 at best for the Commission to accurately determine or measure precisely what the
24 return aî equity investor would require. There are several objective CASE NUMBERS: 08-1783 -G-42T &, 08-17 61-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 13
1 measurements which can be used to determine the relative financial health of a
z utility and its attractiveness as an investment. These include interest coverage and
3 a reasonable level of cash flow from internally generated funds.
4
5 a. WHAT IS THE PURPOSE OF APPENDIX SK-l, SCHEDULE 5?
6
'7 A. The purpose of Schedule 5 is to test the end rèsult of the tarrge of equity return
I numbers derived by applying the market oriented approaches. To this point other
9 gas companies have been used as proxies in order to approximate a range of
10 returns on equity appropriate to Hope. The object is to determine what represents
1_1 a reasonable return to Hope and to its shareholders, who have indirectly invested
L2 in Hope Gas, Inc. dba Dominion Hope. l_3 l4 A. PLEASE EXPLAIN THE FIGURES SHOWN ON APPENDIX SK.1, l_5 SCHEDTJLE 5.
1,6 t7 A. The three sheets of Schedule 5 show the net income (earnings) and the resulting
1B debt coverages, dividend potential and percentages of construction funds
L9 internally generated under different overall rates ofreturn and returns on equity.
20 The columns show the results of assuming returns on equity of 5.90o/o, 6.420/0,
2T 6.95% and 7.47%. Also shown, is a column showing the results at the Staff zz recoilrmended return of 6.72%o presented at the appropriate place in the range of
23 calculated returns, The results with equity returns of 5.90Yo and 7 .47Yo are shown
24 because they represent the approximate lower and upper result of averaging the CASE NUMBERS: 08-1783-G-42T & 08-176I-G-PC
DIRECT TESTIMONY OF: STEVE}T M. KAZ PAGE NUMBER: 14
r DCF and CAPM calculations for each of the nine gas utilities. Schedule 5 is z based on the specific rate base and expense levels reflected in Staff witness 3 Sprinkle's schedules.
4 5 Q. PLEASE EXPLAIN THE CALCULATIONS STAFF USED TO ARRIVE 6 AT THE FEDERAL INCOME TAX AMOUNTS FOT]ND IN APPENDIX z SK-l, SCHEDULES 5 AND 6. I
9 A. The basic inputs and methodologies used to calculate federal income taxes are 10 those found in Staffs Rule 42 Statement A, Schedule 5. The algorithm used to 11 calculate federal income taxes is as follows: L2 FIT: ((R - SD)ER + (Dr - ITC)y(1-ER) 1-3 'Where: 1-4 R : Return on rate base i-s SD : Statutory deductions
16 ER: Effective tax rate (statutory rate less L'7 tax savings percent) 18 DT : Deferred taxes l-9 ITC : Amortízation of investment tax credit 20
2r For cost of service calculations, the interest portion of the statutory deduction 22 follows Mr. Pauley's methodology of applying the weighted cost rate of debt to
23 the rate base.
24 CASE NUMBERS: 08-1783-G-42T & 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M.KAZ PAGE NUMBER: 15
1_ A. WHAT METHODOLOGY DID STAFF USE TO CALCULATE STATE z INCOME TAXES IN.A.PPENDIX SK-1, SCHEDULES 5 AND 6?
3
4 A. The algorithm used to calculate state taxes is as follows:
5 sIT: (R + FIT - SD)SR+DSITXI - SR)
6 Where:
7 R: Return on rate base I FIT: Federal income tax
9 SD : Statutory deduction t_0 SR: State tax l_ l- DSIT: Deferred State Income Taxes
T2 t_3 The methodology and tax rate used of reflects Staffs Rule 42 Exhibit. The
T4 interest portion follows the same methodology used in the federal income tax l_5 calculations.
L6
1,7 A. PLEASE SUMMARIZß. THT, THREE END RESULTS TEST REFLECTED l_8 ON SCHEDULE 5.
L9
20 A. One of the most important measures of relative safety is the interest coverage.
2L Thus, it is possible to say that an overall return on investment (which includes a zz return on equity) is generally reasonable if it results in an interest coverage which
23 does not fall below a certain level. For purposes of Staff s analysis a before tax
24 coverage test of approximately two (2.0) times long term interest charges is used CASE NUMBERS: 08-1783 -G-42T &, 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 16
1 as a test ofrelative safety.
z Schedule 5, Sheet 1 of 3, shows interest and total fixed charge coverage
3 under the range of calculated returns on equity. Long-term Interest coverage
.tA ranges from a low of 3.40 times at a 5.90o/o return on equity to a high of 3.73 times
5 at a 7.47o/o return on equity. Total interest coverage ranges from a low of 3.08
6 times at a 5.90o/o return on equity to a high of 3.38 times at a 7.47%o return on
7 equity.
B Schedule 5, Sheet 2 of 3 shows the retained earnings increment under the
9 range of calculated returns on equity. Staff is including a reasonable, fiscally
10 sound payout rate of 690/o based on Dominion Resources, Inc.'s five (5) year
11 avetage. At that retention level, the low end indicated return would allow for a
L2 dividend of $1.385 million. The high end indicated return would allow for a r3 dividend of $1.755 million.
L4 Schedule 5, Sheet 3 of 3, shows cash flows resulting under the range of
15 calculated returns utilizing the 69% dividend payout rate and the Company's
I6 submitted construction budget data which reflects total average construction of
L7 511.710 million for the year 2010 - 2011. The cash flow coverage of the amount
1_8 budgeted for normal construction, based on Staff s low and high cost of equity, is
T9 8g.4g% at a 5.90o/o equity return and 90.90Yo at a7.47%equity return.
20 2T a. IS THE 690/0 DIVIDEND PAYOUT RATE USED IN STAFF'S CASH zz FLOW IN LINE \MITH THE COMPANY'S FIVE (5) YEAR HISTORIC
23 PAYOUT RATE?
24 CASE NUMBERS: 08-1783 -G-42T &.08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M.KAZ PAGE NUMBER: 17
t_ A. No. Over the past five (5) years the Company has payed out almost 2 times
z (L.92x) more in dividends than its net income over the same time period thereby
3 reducing retained earning by over $10 million dollars. Obviously, this payout rate
4 can not continue in perpetuity nor would be fiscally sound to continue. Staffs
5 69% dividend payout rate provides investors with a reasonable dividend without
6 depleting the Company's retained earning and cash.
7 I A. PLEASE SUMMARIZE AGAIN THE INTEREST COVERAGE AND
9 CASH FLO\ry \ryHICH RESULT FROM STAFF'S RECOMMENDED
10 RETURN ? l_t
1,2 A. End results under Staffs recommended return are shown separately on Schedule 6, l_3 Sheets 1 through 3. An overall return of 5.44% would provide for long-term
I4 interest coverage of 3.57 times, a retained earnings increment $.706 million and
1_5 cash flows of 90.24% of the 2010 - 20Il average construction budget.
T6 t7 A. HOW DOES STAFF'S RECOMMENDED RETURN ON EQUITY t-B COMPARE TO THE COMPANY'S PROPOSED RETURN ON EQUTTY?
L9
20 A. There is a 528 basis point difference between Staffs recornmended return on
2L equity of 6.720/o and the Company's proposed return on equity of 12.00%. zz
23 24 a. WHAT PROBLEMS EXIST IN THE COMPAT'{Y'S CALCULATIONS OF CASE NUMBERS: 08- 1783 -G-42T &. 08-17 6I-G-PC
DIRECT TESTIMONY OF: STEVEN M.KAZ PAGE NUMBER: 18
1 THE COST OF EQUTTY THAT RESULT IN THE OVERSTATEMENT OF
¿ THE COST OF EQUITY?
3
4 A. Generally, the Company's calculations reflect adjustments to the market
5 evaluation model that arc inappropriate and result in the double counting of
6 investors' required premiums. The Company's calculations reflect an adjustment
7 based on the weighted cost of capital of its proxy group. This adjustment is
8 inappropriate. This adjustment results in a larger return on equity to approximate
9 the weighted cost of capital of its proxy group purely based on math, not on a t_0 higher level of risk for Hope. Further, a capítal structure with a smaller portion of
11_ equity than the proxy group is the result of the Company's own actions of
1-2 reducing equity through distribution of dividends that arc greater than earnings.
1_3 Certainly this adjustment should not be made.
1,4 l-5 a. HAS THE STAFF CHANGED ITS APPROACH TO CALCULATING t6 COST OF EQUITY WITH RESPECT TO HOPE GAS?
L7
1B A. No. Staff is not advocating a change to the methodology or inputs it uses in
1,9 determining the cost of equity. Staff is of the opinion that the inputs it uses as 20 well as the cost of equity it is recommending accurately reflect the current
2L financial crisis. Staff has consistently used its current method of averaging the
22 DCF and CAPM and testing the end results to determine the reasonableness of its
23 recommendation. Staff uses the end results test as a check to determine if a given
24 capital structure, debt costs and return on equity produce sufficient interest CASE NUMBERS: 08-1783-G-42T & 08-1761-G-PC
DIRECT TESTIMONY OF: STEVEN M. KAZ PAGE NUMBER: 19
1 coverage, dividend potential and internal cash flows to enable the Company to 2 meet its financial obligation and to attract capital.
3 4 A. WHAT IS STAFF'S RECOMMENDED OVERALL RATE OF RETT]RN 5 AND RETT]RN ON EQUITY?
6
7 A. Staff recommends an overall rate of return of 5.44%and a return on equity of 8 6.72%.
9 i-0 a. DOES THIS CONCLUDE YOURDIRECT TESTIMONY? l_1
L2 A. No. As previously mentioned, I will also be providing confidential testimony l-3 evaluating the debt and equity costs proposed for Hope Gas, Inc., dba Dominion
1-4 Hope ("Hope" or "Compaîy") after the sale to Peoples Hope Gas Companies (PH 15 Gas), an indirect subsidiary of Babcock & Brown Infrastructure Fund North L6 America, LP (BBIFNA) under separate confidential cover due to a pending L7 request(s) for confidential treatment.
1_8
L9
20
2T
22
23
24 APPENDIX SMK-I SCHEDULE 1
HOPE GAS tNC., dba DOMINION HOPE cAsE NOS. 08-1783-G.42T & 08-1761-c-pc CAPITAL STRUCTURE AND COST OF CÄPITAL
Capital Cost Weighted Capital Component Structure Percent Rate Cost (1) (2) (3) (4) $ % % % March 31. 2008
Ilope Gas. Inc. Glope)
Short-Term Debt 29,439,923 18.10 5.20 0.94 Long-Term Debt 63,602,000 40.47 7.04 2.85 Preferred Stock Equity 65,119,243 4t.43
Total ____Js7_J60J66 100.00
March 31. 2008 Dominion Resources. Inc.
Short-Term Debt 1,548,540,512 6.05 4.93 0.30 Long-Term Debt 13,841,990,703 54.12 5.75 3.11 Preferred Stock 257,097,346 1.01 6.61 0.07 Equity 9,929,530,055 38.82
Total __zsflJ_Js8.flL r00.00
Staff Recommended fHope)
Short-Term Debt (Average) 26,316,271 16.97 1.10 0.19 Long-Term Debt 63,602,000 41.02 5.92 2.43 Preferred Stock Equity 65,119,243 42.00 6.72 2.82
Total ____lÊ!Jrzãr r00.00 5.44 APPENDIX SMK-I SCITEDULE 1 Sheet 2
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-c-42T & 08-1761-c-pc SHORT-TERM DEBT
12 Months Ended Sum of No. Average Interest Annual March 31, 2008 Daily Balances Days Balance Expense Rate Rate $$ $ April 566,376,000 30 19,979,200 94,956 0.0045 5.39Vo May 541,013,000 31 17,452,032 81,021 0.0046 5.39Vo June 688,657,000 . 30 22,955,233 103,456 0.0045 5.4tyo July 1,082,821,000 31 340929,710 162,578 0.0047 5.4tvo August 1,260,950,000 31 40,675,906 199,124 0.0049 5.680/0 September 1,202,760,000 30 40,092,000 180,808 0.0045 5.41o/o October 1,171,702,000 31 37,796,939 155,126 0.0041 4.77o/o November 1,0491647,000 30 34,999,233 t31,302 0.0038 4.50o/o I)ecember 906,082,000 31 29,229,452 128,473 0.0044 5.10yo January 659,123,000 31 21,2621032 94,798 0.004s s.l8% February 362,388,000 28 12,942,429 35,156 0.0027 3.490 March 113,920,000 31 30674,939 10,936 0.0030 3.46vo
Annual 9,605,439,000 365 26,316,271 1,367,634 5.200Â
First quarter 2009
January 1,199,700,000 31 38,700,000 44,155 0.0011 t.32vo February 865,899,000 28 30,924,964 21,773 0.0007 0.91o/o March 816,967,000 31 26,353,774 21"773 0.0008 0.96vo
2,882,566,000 g0 32,028,517 87,701 0.0027 t.l0v. APPENDIX SMK-I SCHEDULE 2
HOPE GAS INC., dba DOMINION HOPE casE Nos. 08-1783-c-42T & 08-1761-c-pc DISCOI.INTED CASH FLOW CALCULATIONS SAMPLE GAS DISTRIBUTION UTILITIES
Cost of Companv Price (A) Dividend (B) Yield Growth (c) Equity
(1) (2) (3) (4) (s) $ $ % o//o o//o
AGL Resources, Inc. 28.66 1.55 5.47 2.t8 7.59 Atmos Energy CorporatÍon 23.33 1.33 5.70 1.44 7.14 Laclede Group,Inc. 40.87 r.55 3.79 2.43 6.22 NICOR Inc. 32.4s 1.86 5.73 0.00 s.73 Northwest Natural Gas Co. 42.34 1.62 3.83 s.88 9.71 Piedmont Natural Gas Co.,Inc. 25.26 1.08 4.28 3.61 7.88 South Jersey Industries, Inc. 35.85 1.20 3.35 5.73 9.08 Southwest Gas Corporation 22.15 0.95 4.29 4.69 8.98 WGL Holdings,Inc. 31.97 1.47 4.60 2.04 6.64
Average 4.55 3.11 7.66
\otes (A) Based on average daily closing price for the 13 weeks ended April l0,2009
(B) Next 12 monthsr dividend per Value Line Investment Survey, April17,2009
(C) Dividend growth rate from the current level to the20l2-2014 dividend estimated per Value Line Investment Survey, March 13, 2009 APPENDIX SMK-I SCIIEDULE 3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-c-42T & 08-1761-c-pc CAPITAL ASSET PRICING MODEL CALCULATIONS SAMPLE GAS DISTRIBUTION UTILITTES
Return Market Beta Component Risk-Free Return Companv Premium (A) Coefficient @) (1)x(2) Bate (C) (3)+(4)
(1) (2) (3) (4) (s) t/t o//o t/o %
AGL Resources,Inc. 7.9 0.75 s.93 '0.440 6.37 Atmos Energy Corporation 7,9 0.60 4.74 0.440 5.18 Laclede Group, Inc. 7.9 0.65 s.t4 0.440 5.s8 NICOR Inc. 7.9 0.75 5.93 0.440 6.37 Northwest Natural Gas Co. 7.9 0.60 4.74 0.440 5.18 Piedmont Natural Gas Co.,Inc. 7.9 0.65 5.14 0.440 5.s8 South Jersey Industries, Inc. 7.9 0.65 s.I4 0.440 5.58 Southwest Gas Corporation 7.9 0.70 5.5J 0.440 s.97 WGL Holdings,Inc. 7.9 0.6s 5.14 0.440 5.58
Average 0.67 5.71 lotes (A) stockso Bonds, Bills and rnflation valuation Edition 2009 yearbook,
(B) Value Line Investment Survey, April 17,2009.
(C) Average l3-week T-bill rates: 0.220 Average l3-week T-bill rate for the 13 weeks ended April 10,2009. 0.500 Average 13 week T-bill rate estimated for 2010 per Value Line Investment Survey, February 2012009. 0.600 Average l3-week T-bill rate estimated for four quarters ending fourth quater 2010 per Blue Chip Financial Forecasts, April I,Z00g. APPENDIX SMK-I SCHEDULE 4
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-c-42T & 08-1761-c-pc A\rERAGE OF MARIGT METHODOLOGIES SAMPLE GAS DISTRIBUTION UTILITIES
Company DCF CAPM Average
(1) (2) (3) % % o/"
AGL Resources,Inc. 7.s9 6.37 6.98 Atmos Energy Corporation 7.14 5.18 6.16 Laclede Groupr lnc. 6.22 s.58 s.90 NICOR Inc. 5.73 6.37 6.0s Northwest Natural Gas Co. 9.71 5.18 7.44 Piedmont Natural Gas Co.,Inc. 7.88 s.s8 6.73 South Jersey Industries, Inc. 9.08 5.58 7.33 Southwest Gas Corporation 8.98 5.97 7.47 WGL Holdings,Inc. 6.64 s.58 6.11
Average 7.66 5.71 6.72 APPENDIX SMK-I SCHEDULE 5 Sheet 1of3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1 783-c-42T &. 08-17 61 -c-pc INTEREST COVERAGE
Total Rate of Return (%) s.09 s.32 5.44 5.53 5.75 Retum on Equity (%) ___l.eg_ 6.42 6.72 __ r2!_ 7.47
(1) (2) (3) (4) (s) $ (000) $ (000) $ (000) $ (oo0) $ (oo0)
Rate Base ____qte_ ____qua¿ ____4¿!2_ ____L192 ___!1J!¿
Operating Income 4,128 4,315 4,412 4,4g5 4,663 Federal lncome Tax 2,576 2,601 2,614 2,624 2,649 State Income Tax 8 t6 35
Pretax Earnings 6,704 6,916 7,034 7,125 7,346 Net Deductions, Excluding Interest & Debt Amortization (1)
Eamings Base (L-T Debt) 6,704 6,916 7,034 7,125 7,346 Interest On Long-Term Debt ----J97r _____r911______lÊlr ___JplL _____!211
Pretax Earnings 6,704 6,9L6 7,034 7,125 7,346 Net Deductions, Excluding lnterest & Debt Amortization (1) 154 154 L54 rs4 154
Earnings Base (Total Debt) 6,550 6,762 6,880 6,970 7,lgl Total Interest __a2L ____2]2s 2,125 2,12é 2,125
Long-Term Interest Coverage (X) 3.40 3.51 3.57 3.62 3.73 Total Interest Coverage (X) 3.08 3.18 3.24 3.28 3.38 APPENDIX SMK-I SCHEDULE 5 Sheet 2 of3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-c-42T & 08-1761-c-pc DTVIDEND AND RETAINED EARNINGS POTENTIAL
Total Rate of Return (%) 5.09 5.32 5.44 5.53 5.75 Return on Equity (%) _se9__ 6.42 6.9s J.47_
(1) (2) (3) (4) (s) s (ooo) $ (000) $ (000) $ (000) $ (000)
Rate Base ___iu!¿ _g¿f02_ ___!uqz_ __L19¿ ___ill!¿
Operating Income 4,128 4,315 4,412 4,495 4,663 Net Income Deductions 2,r25 2,125 2,125 2,125 2,125
Net Income 2,003 2,r90 2,287 2,360 2,538 Preferred Dividend 0 0 0 0 0
Available For Common 2,003 2,190 2,297 2,360 2,539 Common Dividend 1,395 r,514 1,581 1,631 L,755
Retained Earnings Increment 619 676 ___J9L 729 784
Total Dividends (%) 69.r2 69.12 69.12 69.12 69.t2 Common Dividend (%) 69.r2 69.12 69.12 69.12 69.t2 Retention Rate (%) 30.88 30.88 30.88 30.88 30.88 APPENDIXSMK-I SCHEDULE 5 Sheet 3 of3
HOPE GAS INC., dba DOMIMON HOPE CASE NOS. 08-t783-c-42T & 08-1761-c-pc CASH FLOW
Total Rate of Return (%) 5.09 s.32 5.44 5.53 5.75 Refirn on Equity (%) 5.90 __5.42__ 6.72 6.95 _l_.47_
(1) (2) (3) (4) (5) $ (000) $ (ooo) $ (000) $ (ooo) s (000)
Net Income 2,003 2,r90 2,297 2,360 2,539 Non-Cash Charges (Credits) 9,861 9,861 9,861 9,861 9,961
Subtotal I 1,964 12,050 12,148 12,22r 12,3gg Preferred Dividends 0 0 0 0 0 Common Dividends 1,3g5 t,5t4 1.581 r,755
Available For Construction 10,479 r0,537 10,567 10,589 10,644 Average 2009 -2010 Capital Additions __l_ll_19_ __JtfJg_ __JlfJ!_ _rry_19_ __uf_!0
Percent Internally Generated (%) ___89_.49_ ____q9.e!_ 90.24 90.43 90.90 APPENDIX SMK-I SCHEDULE 6 Sheet I of3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-G-42T & 08-1761-c-pc INTEREST COVERAGE STAFF RECOMMENDED RETIIRN
Total Rate of Return (%) Return on Equity (%)
s (000)
Rate Base _____!1J_qz_
Operating Income 4,412 Federal Income Tax 2,674 State Income Tax 8
Pretax Earnings 7,034 Net Deductions, Excluding Interest & Debt Amortization (1) 0
Earnings Base (L-T Debt) 7,034 Interest On Long-Term Debt
Pretax Earnings 7,034 Net Deductions, Excluding Interest & Debt Amortization (1)
Earnings Base (Total Debt) 7,034 Total Interest 2,r25
Long-Term Interest Coverage (X) 3.57 Total Interest Coverage (X) J.J I APPENDIX SMK-I SCHEDIILE 6 Sheet 2 of 3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-c-42T &, 08-1761-c-pc PAYOUT RATIOS DIVIDEND AND RETAINED EARNINGS POTENTIAL
Total Rate of Return (%) 5.44 Return on Equity (%) ___932_
$ (000)
Rate Base ___81,i02
Operating Income 4,41"2 Net Income Deductions 2,r25
Net Income 2,287 Preferred Dividend 0
Available For Common 2,297 Common Dividend 1,591
Retained Earnings Increment 706
Total Dividends (%) 69.12 Common Dividend (%) 69.r2 Retention Rate (%) 30.88 APPENDIX SMK-I SCHEDIILE 6 Sheet 3 of3
HOPE GAS INC., dba DOMINION HOPE CASE NOS. 08-1783-G-42T &, 08-1 761 -c-pc CASH FLOW STAFF RECOMMENDED RETURN
Total Rate of Return (%) 5.44 Return on Equity (%) _512
$ (000)
Net Income 2,297 Non-Cash Charges (Credits) 9,961
Subtotal 12,l4g Preferred Dividends 0 Common Dividends 1,591
Available For Construction 10,567 Average 2009 -2010 Capital Additions _lJJr0
Percent Internally Generated (%) 90.24
', '-_': :r a , .j,. i.r:Ì ... : .' -.. '; - I{QPE GÄS, ENC, dba,D0:t\{INION I{OPE ' ÐoMrNfoN..t., RESOURCES, rNC,,'i , ,,, pnopLns HOPE GAS,CÐ1\4PANIES, T,tC
, ,., ' ',' cASE'No. o-8-lz6l-G-PC'
PREVTOUSLY FILÐD CONFIDRNTIAL . DIRECT TESTIMONY
': , UTIT,ITIES DWISION 't STEVEN M,KAT,, L-r atVV-t. ' .r. . ,.r ' l: .
PUBLIC SERVICE COMMISSION OF\ryEST WRGTNIA
l
---RELEASED :. - ; FOI{ PUtsLIC DISCLOSURE' - - BY \ryRIT'TEN. PERMISSION OF BBIFNA & PE,OPLES HOPE GAS ON
MÄY- 20,2A09
***ìk?k?krk
rP 201 Brooks Street, Charleston. WV 25301 E å o Tø clz UÈ STftFtr ubtric ce t^\r-^' ommission \-/ ol Wesr !-irginia
HOPE GAS, fNC, d-ba :DOMINI,ON :IÍOP,E DON¿ffl\l:I.ON RESOURCES,,INC.''' PEOPLES HOPE GAS COMPANIES, T LC :Ë
ÌÇ, \Ð . CASE NO. 08- 1 V83.G-+27 rc:' mr:_r Þ-ct f1 CASE NO. 08-1761-c+C çijr'- rt ;á Pt: r',s- Ë; ç:Í. f-tl <-i:. -o T.< .CONFTDE}JTIAL Ut=: t n-.' eil r*, ;j; DIRECT TESTTMONY o:r*¡ 'r\)
PREPARED BY STEVEN M. KAZ UTILITIES DIVISIO}T
oN BEHALF OF Tr{E STAFF,,OF THE PUBLIC SERVICE COMMISSION OF WEST VIRGIMA ***{<**
April 24,2A09
201 Brooks Stree!, P. O. Box 81"2,,C¡*1.ston, WV 25323 CASE \ILMBERS: 08-1783-G-42T & 08-176i-G-pC
CONFIDENTIAL DIRECT TESTIMONY OF: STEVE].J M.KAZ PAGE
NUMBER: 1
1 a. WOULD YOU STATE YOUR NIAME, BUSINESS ADDRESS AND
2 OCCUPATIOT.{?
3
4 A. My name is steven M. Kaz and my business address.,*: p o. Box grz, 'West 5 Clrarieston, Virginia 25323. i am a Utilities ,tna,tystiS¿peårisor for the
6 lltilities Division of the Public service commissiopor''.wärtÄîginiu.''t'o''' 't" 7 ,í"'!f,'"' ,.,t¡:,
I a. wIIAT IS THE PURPoSE oF YoUR o#*o*it',Ï.r4.*+*.,g1* ,_ ¡t' "i.. t, ,1î' \, t-0 A. The purpose of my testimony .is-øo-lffir.art Staffs evaluation of the debt and ,:.;:; tl_ equity costs proposed for H_oeq,.,i, Gaði inc., dba Dominion Hope ("Hope', or ,.i:. r;i;¡Ì. L2 "Company'') after the sal'ë to-Æebpiés Hope Gas Companies (PH Gas), an indirect '&+, 't*ir 13 subsidiary of B1Þ.coðk,.&;".Brown Infrastructure Fund North America, Lp ';Îl4tr4isji'';ì*Þi a4 (BBIFNA) læ+iåaA¿îëîfftthe capital structure and cost of capital for Hope under þ, '+,, 15 the propo_sgdpcquidiúioo - ^-n."fi,ï:' "'";... ugree*ent and PH Gas ownership. ' .,,;i:i "/;: ,uï¡.q:{.,ti 16 iii ti;,,, -"" 'Èh,. ;t L7 a. EXPLAIÞ{:¡,-4rHAT WAS PRESENTED CONCERNING TI{E CApIT.^L
1B STRUCTURE OF HOPE TINDER THE OWNERSHIP OF PH GAS? 19
20 A. The capital structure presented for Hope under PH Gas is strictly a pro forma
2L capital structure. Appendix SMK-2 reflects the requested capitai structure, put
22 forth by PH Gas, of 44.66% long-term debt and 55.34% equity, pH Gas, in its
23 Rule 42 filing, indicates that ít will assume long-term debt at an embedded rate of CASE NLIN4BERS: 08-1783-G-42T & 08=1761-c-PC
COI{FIDENTIAL DIRECT TESTIMONY OF: STE\/EN M. i(AZ PAGE NUMBER: 2
1 7 .04%. PH Gas has not provided any calculations nor cost rates to substantiate its
2 assenion thatT.04o/o will be the embedded cost of its long-term debt. PH Gas has
3 included no shorl-term debt in its proposed capitai structure. Short-term debt is
4 generally the least expensive component of the overall cost of capital, The *t"r* /,it. 5 cun'ent short-term debt rate being incurred. by Hope is 1.1t0.%. \ìo../"| "'t;l**ì,o,,,oll" ,j;,,, '+..-.f . 6 ';t. ,.i. ,,..1r \, _î 7 a. DOES STAFF HAVE ANV CONCERNS ¡*',öUr ffuË O\'ERALL COST t o,,,, t''i", I OF CAPITAL FOR trIOPE UNDER TIIE^OWåNERSIIIP OF PH GAS? , "tfr*v,ii1+afu 9 ,rÍti' \ ::,i. .{f"" 1r, 10 A. PH Gas has provided no detaii o!,,.sd-gìfi4{isrü to substantiate its proposed capital
1l_ structure and cost of capitalo, Cegain Êredit facilities ' 'tir,," 'Y"r..Ë,ii:: made available to Staff do .la, L2 not contain cost rates. Itrfaçt.any,¡dtes originally contained in the faciiities have
13 been marked out to ible. At this time, Staff has no idea what the cost of 14 debt wili be Staff also has serious concerns over the lack of short- l_5 prg.posed capital structure. staff recommends the commission ,¡ïtå*y #,he.?s, "Ço...**i,¿i l-5 not apfrv. tUËËi".n capital structure given the lack of information. fu"_,,"dä t7 '.r$:rÌ l-8 A. DOES THIS CONCLUDE YOUR COI.{FIDENTIAL DIRECT I9 TESTIMONY? )(\
2L A, Yes, it does,
22
23 APPENDIX SMK-2 CONFIDENTIA.L SCITEDULE 1
IIOPE GAS INC., dba DOMINION IIOPE TINDER PII GAS CASE NOS. 08-1 783-c-42T & 08-1761-C-pC CAPITAL STRUCTI'RE AND COST OF CAPITAL
Capital Cost Weighted Capital Componeut Structure Percent Rate Cost (1) (2) (3) (4) o/r, o/ $ /o o//o
PH Gas (Proieçted)
Short-Term Debt (Average) Long-Term Debt 70,000,000 44.66 3.15 Preferred Stock Equity 86.735.000 55.34
Total 1s6.735.000 100.00
CASF NO. 08.1783-G-427 HOPE GAS, rNC., dba DOMINION HOPE
ON BEHALF OF THE STAFF OF THE PUBLIC SERVICE COMMISSION OF WEST VIRGINIA
DIRECT TESTIMONY PREPARED BY PAUL P. STE\MART
ON BEHALF OF THE UTILITIES DIVISION
,r?k*túrr**
April 24,20&
201 Brooks Street, Charleston,'WV 25301 Page No.L Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 a. Please state your name and business address.
2
Ja A. My name is Paul P. Stewart and my business address is 506 17ft Street
4 Dunbar, West Virginia.
5
6 a. By whom are you employed and in what capacity?
7
8 A. I arn currently self-employed and I am performing work for the Utilities
9 Division of the Public Service Commission of West Virginia under contract as l0 a vendor, Paul Stewart Consulting, LLC
11
T2 a. Please briefly state your educational and professional quâlifications. i3 t4 A. I graduated from West Virginia State College with a Bachelor of Arts Degree
15 in 1969 and received a Master of Business Administration Degree from the
'West 16 Virginia College of Graduate Studies in 1979. I was employed by the 'West t7 Public Service Commission of Virginia from September 1973 through
18 October 2008. I was Deputy Director of the Utilities Division at the time of my
19 retirement. Over the course of my career with the agency, I prepared and/or
20 supervised the preparation of Rule 42 Exhibits, class cost of service studies,
2t cost of capital studies and various other reports for presentation before the
I of14 Page No.2 Case No. 08-1783-G.427
DIRECT TESTIMOITI-Y OF: PauI P. Stewart
'West 1 Public Service Commission of Virginia. I have presented expert witness
2 testimony in various matters concerning telephone, natural gas, electric, water
J and sewer utilities as well as regulated motor carriers and solid waste facilities.
4
5 a. What is the purpose of your testimony in this proceedingtoday?
6
7 A. The purpose of my testimony is to present the Class Cost of Service Study
8 (CCOS) and the resulting class revenue requirements and rate design
9 recoÍrmendations in the case on behalf of the Utilities Division".
10
11 a. What is the purpose of a class cost of service study (CCOS)?
12
13 A. The purpose of a CCOS is to develop a general set of cost profilês by class of t4 customer and/or rate schedule which may be used as a guide to the assignment
15 of revenue responsibilities to those gïoups of customers. The results of the t6 study can then be used as a guide to design rates for the various groups of t7 customers which will recover costs approximating the general class cost
18 profiles developed. Although a variety of approaches and philosophies may be
1,9 used to develop approximations of cost responsibility by customer class or rate
20 schedule as can be seen by comparing the details of the studies presented by
2l Hope Gas, Inc. (Hope) , CAD and Staff in this case, the three CCOS have
2of14 Page No.3 Case No. 08-1783-G-427
DIRECT TESTIMONI-Y OF: Paul P. Stewart
I common elements. The first step is to functionalize costs based on the basic
2 physical elements of a natural gas utility operation: gathering, storage,
J^ transmission and distribution. The second step is to classify the functio naIízed
4 costs as demand, commodity or customer related. The final step in the
5 development of a CCOS is to allocate the total of all costs to customer classes
6 using direct assignments, primary factors such as contribution to peak demand,
7 and composite factors which flow from application of the primary factors.
8
9 a. Has the Commission approved any specific methodology for development of a
10 CCOS for Hope Gas, Inc. previously to this case?
11
T2 A. Yes. By order in Case No. 93-0004-G-42T, entered October 23, 1993, the
13 Commission approved a specific cost and revenue allocation methodology for
t4 Hope.
15
t6 a. Please explain how that Commission order relates to the issues in this case?
17
18 A. In the 1993 case the Commission ruled that Administrative and General
t9 (A&G) expenses should be allocated 50o/o by throughput and 50% based on
20 Operation and Maintenance expenses excluding A&G. The Commission found
2l that a large portion of A&G expenses represents general overhead costs that
3of14 Page No.4 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 cannot be specifically identified as related to the provision of service to either
2 sales customers or transportation customers. Accordingly, because most of
J Hope's O&M expenses, excluding A&G, are allocated to sales customers, a
4 methodology which does not include throughput in the development of an
5 A&G allocation factor will result in sales customers bearing responsibility for
6 an uffeasonably large share of A&G expenses.
7
8 a. Does the CCOS presented on behalf of Staff reflect the methodology specified
9 by the Commission in Case No. 93-0004-G-42T with regard to the allocation
10 of A&G expenses?
11
L2 A. For the most part Staff s CCOS does reflect the methodology specified in the t3 Commission's 1993 order. In the Staff CCOS all A&G expenses except t4 Employee Pensions and Benefits were allocated using Staff Factor 32-
15 C&OMxPG which is a composite factor derived by weighting Commodity and
T6 O&M expenses, excluding purchased gas, equally. Staff allocated Employee t7 Pensions and Benefits based on the distribution of direct labor. Unlike most
18 other expenses included within A&G, Employee Pensions & Benefits are
T9 tracked well by direct labor. Accordingly, the use of this allocation
20 methodology results in a greater degree of internal consistency than would
2t have application of a 50/50 Commodity/O&M factor.
4of14 Page No.S Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
I
2 a. Does the CCOS presented on behalf of Hope reflect the methodology specified
J by the Commission in Case No. 93-0004-G-42T with regard to the allocation
4 of A&G expenses?
5
6 A. No. The methodology used by Hope to allocate A&G expenses does not
7 reflect the use of throughput at all nor does it reflect the distribution of O&M
8 expenses generally. A&G expenses in Hope's.CCOS are allocated by a
9 composite factor based its allocation of Customer Accounts Expense,
10 Customer Services & Information Expense and Sales Expense which factor is
11 heavily weighted by number of customers. t2
13 a. Does the Staff methodology reflect the use of the 50/50 CommoditylO&M
14 allocation factor elsewhere within its CCOS?
15 t6 A. Yes. The 50/50 Commodity/O&M factor was also used to allocate General
17 Plant and Accumulated Depreciation of General Plant within rate base and as
18 well as to allocate General Plant depreciation expense. As with A&G expense,
19 the amounts recorded in these accounts are reprpsentative of general overheads
20 which cannot be specifically identified with provision of service to either sales
2t customers or transportation customers. To allocate these costs in the same
5of14 Page No.6 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 manner as A&G expenses is consistent with the Commission's 1993 order in
2 that it achieves a reasonable sharing of these costs among sales customers and
J transportation customers. By way of contrast, Hope's CCOS allocates General
4 Plant costs by net distribution plant.
5
6 a. Is the manner is which Staff allocated customer related plant costs in this case
7 consistent with the methodology which was used in Stafls CCOS in Hope's
8 last general rate case, Case No. 05-0304-G-42T?
9
10 A. Yes. As in Case No. 05-0304-G-42T, Staffls CCOS allocates services using
11 factor 21-CUSTNC which represents a 50/50 weighting of number of
T2 customers and non-coincident peak in order to reflect that overall costs tend to
13 be higher on a per customer basis for larger customers. However, that t4 allocation factor has been modified from last case to exclude industrial
15 customers in light of Hope's clarification that all such costs for industrial
I6 customers are recorded in Account No. 385, Industrial M&R Equipment. Also t7 in this case Staff has again adopted Hope's factors and methodology to allocate
18 meters and installations which are based on number of customers weighted by
19 investment costs.
20
2T a. Do Staff s allocation factors reflect weather normalization?
6of14 Page No.7 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: PauI P. Stewart
I
2 A. Yes. The test year data from which the factors related to sales volumes and
Ja contributions to peak were calculated have been adjusted to reflect the weather
4 normalization adjustments made by Staff in its Rule 42Evjrribit.
5
6 a. Was the allocation of storage gas developed in this case consistent with the
7 methodology applied by Staff in Hope's 1995 generalrate filing?
8
9 A. Yes. Once again storage gas was allocated using Factor 5-SIMB which
10 represents annual sales plus daily balancing volumes. This is in recognition
11 that the existence of storage capacity also gives the utility the ability to t2 accommodate imbalances that occur between transportation deliveries of gas t3 and actual gas usage on the parts of those customers. These imbalances occur
14 because of daily over and under deliveries, and the resultant use of the storage
15 capacity occurs in order for the Company to be able to balance these daily over t6 and under deliveries on behalf of transportation customers. Transportation t7 customers share in the benefits of that capacity even though the natural gas
18 held in storage was not nominally purchased in order to facilitate service t9 provided to them. Absent the Company's purchase and storage of gas to serve
20 the sales customers, physical delivery of transport gas service would not be
2t seamless for the transportation customers.
7 ofl4 Page No.8 Case No. 08-1783-G-427
DIRECT TESTIMOIYY OF: Paul P. Stewart
I a. How does the CCOS presented in this case differ from the one presented in the
2 previous case in terms of the handling of purchased gas revenue and expense?
J
4 A. Consistent with the manner of presentation reflected in Staff s Rule 42 Exhibit,
5 the CCOS contains purchased gas expense and revenue. On Schedule 5,
6 Operation and Maintenance Expenses, Gas Supply has been broken into Gas
7 Supply - Purchased Gas and Gas Supply- Other to reflect purchased gas
8 expense as a separate item. The item Gas Supply - Purchased Gas also
9 contains purchased gas expenses which had been recorded in Transmission,
10 Mains and Services, and Other Distribution Expense. Gas Supply - Purchased
11 Gas was allocated in accordance with purchased ,u, ,"u.nre as shown on
12 Schedule 4, Operating Revenues, in order to achieve consistent correspondence
13 between purchased gas expense and revenue on a class basis. This approach
T4 will also assure that rate design will clearly separate purchased gas costs from
15 the margin (base rate) component of Hope's rates. t6
17 a. Please summarize the format of Staffs class cost of service study and the
18 results of that study.
19
20 A. Exhibit PPS-I is based on and reflects Staffs Rule 42 Exhibit and
21 recommended revenue requirements under the scenario of no change in
8 of14 Page No.9 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 Company ownership. Schedule 1 is the summary of revenue requirements as
2 recommended by Staff and Schedule 2 is a summary of Hope's achieved rate
J of return. Schedule 3 shows rate base as allocated to customer classes.
4 Schedule 4 shows class revenues. Schedules 5, 6, and 7 show the allocation of
5 Operation and Maintenance Expense, Depreciation and Other Taxes, and
6 Income Taxes, respectively. Schedule 8 shows the allocation factors used in
7 the study and Schedule 9 shows the development of the labor allocator.
8 Schedule 10 shows the calculation of the base balancing charge, Schedule 11
9 shows the calculation of the indicated customer charges, Schedule L2 shows
10 the margin class cost analysis, and Schedule 13 shows the fully distributed
11 transportation analysis.
T2
T3 a. What is Staff 's overall revenue recommendation?
T4
15 A. Staff is recommending an overall revenue decrease of $1,112,425 as reflected t6 on Exhibit PPS-I, Schedule 1, Sheet 1 of 3. (The decrease amount of
T7 51,112,406 shown on PPS-I, Schedule I is the result of rounding error.) A
18 revenue decrease is indicated for each of the customer classes except for the
I9 LCI-D and LCI-DS classes (Columns 6 and 7) which indicate the need for
20 increases of $897,887 and $4,185,976, respectively. Staff is recommending
2l that the rates remain unchanged for these Talíer two classes (LCI-D and LCI-
9 of14 Page No.10 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 DS), and that the total reduction of 51,112,425 be allocated proportionately to
2 the other four classes where reductions are indicated. The approach would
J apply the concept of gradualism towards eventually realigning fully the various
4 classes' relative revenue responsibilities while easing the burden of that
5 realignment to the classes requiring increases. This approach is consistent with
6 Commission practice in past cases.
7
8 a. Is Staff recommendirLg aîy increases and decreases in customer charges for the
9 RS, SGS, and LGS classes as indicated on Exhibit PPS-I, Schedule 11.
10
11 A. No. Although a decrease is indicated for the RS class and increases are
12 indicated for the SGS and LGS classes, the current charges are generally
13 reasonable. Accordingly, it is recommended that the decreased overall t4 revenue responsibilities of those classes be implemented through reductions in
15 commodity charges.
L6 t7 a. What is the purpose of PPS-1, Schedule 12?
18
19 A. This schedule shows the results of the margin (base rate) cost analysis. It
20 represents the allocation of all costs excluding those related to the elements of
2l purchased gas expense. In previous studies this schedule would been the first
10 of 14 Page No.ll Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 page of the CCOS. This schedule reflects the base revenue responsibilities of
2 each of the customer classes. It yields the same results in terms of increases
J and decreases on a class basis as found on Schedule 1 (subject to rounding
4 error) and serves as a proof ofthe accuracy of Schedule 1.
5
6 a. What is the purpose of Schedule 13?
7
8 A. This schedule shows the fully distributed transportation analysis. It was
9 developed in the same marurer as Schedule 12 but goes the additional step of
10 excluding all coast related to gas production and storage. Staff recommends
11 that the transportation rates be established based on this cost analysis. In
12 addition, it is recommended that the incremental revenue generated on
13 transportation volumes charged at rates flexed to fulI margin be credited back
14 to the classes on the basis of the differential in the operation and maintenance
15 expenses between fully dishibuted transportation and full margin class cost of
1,6 service studies. t7
18 a. What is Staff recoÍrmending with respect to rate design for special contract t9 customers?
20
11 of14 Page No.12 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: PauI P. Stewart
1 A. Staff is recommending that the rate design initially reflect the revenue from the
2 special contract customers at their non-discounted rates. Staff believes'that
J the Company must demonstrate that any revenue shortfall from a fully
4 distributed cost of service is clearly justified. If the Company justifies a
5 flexed-down revenue level, the difference should be spread back to non-special
6 contract customers based on the relative revenue requirements of the individual
7 classes.
8
9 a. Except for the rate related items discussed above, does Staff disagree with any
10 of the Company's proposed tariff changes?
11
'Weather T2 A. Yes. Staff objects to the WNA, Normalization Adjustment, and to PR
13 Rider, Pipeline Replacement Rider. I will address the weather normalization
T4 issue. The PR Rider will be addressed in the testimony of Staff wiûresses
15 Sprinkle and deGruyter. t6 t7 a. Please continue.
18
19 Staff recommends that the Weather Normalízation Adjustment be denied
20 because the Company has offered no supporting testimony or exhibits which
2T would permit Staff to evaluate its impact either on customers' bills or the
12 of 14 Page No.13 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 earnings of the Company, much less the mechanics of its calculation or
2 application. The testimony of Mr. McKeown on behalf of Hope references
J Case No. 07-2230G-PC, Blacksville Oil &. Gas Company, et al. The
4 Commission order in that case approved a weather normalization pilot program
5 for which eight small gas utilities are eligible, and he asks that Hope be
6 permitted to join that program. Although his testimony indicates that the
7 weather normalization adjustment would be based on variances in heating
8 degree days (HDD) as measured against a base yea\ exactly how the annual
9 adjustment would be calculated is not discussed. Likewise, the separate t0 petition requesting approval of the WNA attached to Hope's filing states that
11 the proposed WNA is "similar" to that approved in Case No. 07-2230-G-PC, t2 but does not explain the ways in which it is "similar" nor, perhaps more
13 importantly, how the proposed'WNA is different. My experience preparing t4 Staff s testimony in Case No. 07-2230-G-PC and developing the methodology l5 ultimately adopted to calculate the WNA in that case indicates to me that there t6 ate a lot of different ways to calculate a WNA which may be "similar" in t7 appearance but which may lead to somewhat different results.
18
19 a. Beyond the absence of detail submitted in support of the'WNA, are there other
20 concerns with Hope's request?
2l
13 of 14 Page No.14 Case No. 08-1783-G-427
DIRECT TESTIMONY OF: Paul P. Stewart
1 A. Yes, there are. The'vVNA process approved in Case No. 07-2230-G-PC is a
2 small gas utility "pilot program" the results of which have yet to be evaluated.
J Hope is not a small utility by West Virginia standards. The owners of those
4 eight small utilities which are eligible to participate in the program receive
5 income from those utilities primarily in the form of salaries as
6 officers/managers rather than through dividends paid as retum on investment.
7 Their access to capital markets are far more restricted than is Hope's. When
8 recommending that the WNA be approved for those companies, Staff was
9 more concerned with their cash flow requirements than their nominal returns
10 on equity. Before approving a WNA for a larger investor owned utility such as
11 Hope, the Commission should consider the degree to which the WNA will
T2 "guarantee" that the Company will fully recover its awarded margin, regardless
13 of sales levels, and whether that reduction in volume related risk is sufficient to
T4 require a discrete adjustment to reflect reduced overall risk when awarding a
15 return on equity. Nothing has been submitted in support of the WNA which r6 begins to address this question.
T7
18 a. Does this conclude your testimony. t9
20 A. Yes, it does.
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Éû &p úca &ca o& oú ¿ æ úob c.¡ c.t À õ¡ Ê.Nc¿ al^^ t^ m olómlo+o \o o Factor Basis For Rate Total Allocation Nun-rþer Allocation Schedule Units -FactoÌ 1-COM Commodity RS 7,775,733 0.146s (In MCF) SGS 2,827,333 0.0533 LGS 705,387 0.0133 WS 409,646 0.0077 LCI-D 4,s56,446 0.0859 LCI-DS 36,796,565 0.6933 Total 53,071, i 1 I 1.0000 2-COMH Commodiry-Hi Pressure RS 7,429.855 0.4159 (ln MCF) SGS 2,784.058 0.1 558 LGS 720,t'79 0.0403 WS 1 18,282 0.0066 LCI-D 4,632,702 0.2593 LCI-DS 2,18 1,096 0.1221 Tota1 l'7,866,172 1.0000 3-COML Commodity-Lo Pressure RS '1,429,855 0.6795 (In MCF) SGS 2,784,058 0.2s46 LGS 720,179 0.0659 ws LCI-D LCI-DS Total 10,934,092 1.0000 4-SALES AnnuaÌ Sales RS 7,775,733 0.6710 (In McF) SGS 2,720,691 0.2348 LGS 428,053 0.0369 WS 409,646 0.03s4 LCI-D 253,932 0.0219 LCI-DS Total 11,588,055 1.0000 5-SIMB An¡ual Sales RS 7,775,733 0.6604 Imbalances SGS 2,'769.248 0.2352 MDV LGS 443,|9 0.0376 (In MCF) v/s 409,646 0.0348 LCI-D 3 I 9,783 0.0272 LCI-DS 57,553 0.0049 Total 11,775,082 1.0000 6-DTS Demand RS 66,753 0.5208 Average Day Peak SGS 24.n2 0.r881 Transmission & Storage LGS a 1\') 0.0332 WS 3.749 0.0292 LCI-D l 8,639 0.1454 LCI-DS 1 0,678 0.0833 Total 1 28,1 83 1.0000 HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS-1 CLASS COST OF SERVICE STUDY SCHEDULE 8 cAsE No. 08-1783-G-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor .I-DH Demand RS 62,508 0.5430 Average Day Peak SGS 22,959 0.t994 High Præsure Dist LGS 4,040 0.0351 WS 1,082 0.0094 LCI-D 18,639 0. i 619 LCI-DS 5,893 0.0512 I Otal I 15,12i 1.0000 8-DL Demand RS 62,508 0.6984 Average Peak Day SGS 22,9s9 0.2565 Low Pressure Dist LGS 4.040 0.0451 (ln MCF) WS LCI-D LCI.DS Total 89,507 1.0000 9.MMR Meter & RS I 05.052 0.9190 M&R Stations SGS 8,964 0.0't84 LGS tt 0.0006 WS 49 0.0004 LCI.D 133 0.0012 LCI-DS 36 0.0003 Total I r4,305 i.0000 IO-IMR Industrial RS M&R Stations SGS LGS WS LCI-D 37 0.7708 LCI-DS 1l 0.2292 Total 48 1.0000 11-METR$ Meters $ RS 3,940,405 0.6422 SGS 2,061,807 0.3360 LGS 65,877 0.0107 WS 29,'707 0.0048 LC]-D 38,380 0.0063 LCI-DS Total 6,136,176 i.0000 12-METRI Meter Installations $ RS 6,206,176 0.8950 SGS 716,353 0.1033 LGS 5,6'14 0.0008 WS 3,916 0.0006 LCI-D 2,477 0.0004 LCI-DS Total 6,934,596 1.0000 HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS-1 CLASS COST OF SERVICE STUDY SCHEDULE 8 CASE NO. 08-i783-G-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor 13-CUST Customers RS I 05,052 0.9206 SGS 8,964 0.0786 LGS 28 0.0002 ws l2 0.000r LCI-D 40 0.0004 LCI.DS 1l 0.0001 Total t14,107 1.0000 I4-CUSTI Custômers RS Industrial SGS LGS WS LCI-D 37 0.7708 LCI-DS 1l 0.2292 Total 48 1.0000 15-CUSTRG Customers RS 105,052 0.92r 0 Residentiaì & General SGS 8,964 0.0786 LGS 28 0.0002 WS t2 0.0001 LCI.D 3 0.0000 LCI-DS Total I 14,059 1,0000 I6-CUSTS Sales Customers RS 105,052 0.9217 SGS 8,883 0.0779 LGS l8 0.0002 WS 12 0.0001 LCI-D 14 0.0001 LCI-DS Total 113,979 1.0000 17-CDTS Commodify 50% RS 0.3336 Demand 50% SGS 0.t207 T¡ans & Storage LGS 0.0232 Factors 1 & 6 ws 0.0185 LCI-D 0.1 156 LCI-DS 0.3883 Total i.0000 18-CDH Commodity 50% RS 0.4794 Demand 50o% SCS 0.1776 High Pressure LGS 0.0377 Faclors 2 & 7 WS 0.0080 LCI.D 0.2106 LCI-DS 0.0866 Total 1.0000 HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS-I CLASS COST OF SERVICE STUDY SCIIEDULE 8 CASE NO. 08-1783-G-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Tot¿l Allocation Number Allocation Schedule Units Factor r9-cDL Commodity 50% RS 0.6889 Demand 50% SGS 0.2556 Low Pressure LGS 0.0555 Factors 3 & 8 WS LCI-D LCI-DS Tot¿l 1.0000 2o-PEAKNC Commodity (Mcf) RS 68,433 0.s575 Avg Three-3 Day Peak SGS 25,061 0.2042 By Customer Class LGS 2,368 0.0193 (Non-Coincidental) ws 2,451 0.0200 LCI-D 18,293 0.1 490 LCI-DS 6,t33 0.0500 Total t22,739 1.0000 21-CUSTNC Customer 50% RS tJ.7391 Non-Coincindental Peak 50% SGS 0.1414 Factors 13 & 20 LGS 0.0098 ws 0.0100 LCI-D 0.0747 LCI-DS 0.0250 Tot¿l 1.0000 22-MAINS Mains $ RS 78,2'16,696 0.5596 Low & High SGS 29,018,s84 0.2075 LGS 6,226,496 0.0445 WS 69 i,508 0.0049 LCI-D 18,182,421 0.1300 LCI-DS 't,479,569 0.0535 Total 139.875,275 1.0000 23-MS Mains & Services $ RS 109,234,359 0.6010 SGS 34,940,00 r 0.1922 LGS 6,635,686 0.0365 WS 1,1tlp23 0.006r LCI-D 21,3 I 1,089 0.1172 LCI-DS 8,528,059 0.0469 Total 181,761,t17 1.0000 24-MTRHR Meters & House Regulators RS I 5,783,866 0.8052 SGS 3,643,1 1 0 0.1 858 LGS 86,601 0.0044 WS 40,788 0.0021 LCI-D 48,994 0.0025 LCI-DS Total I 9,603,359 1.0000 HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS-I CLASS COST OF SERVICE STUDY SCHEDULE 8 CASE NO. 08-1783-G-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation NupbeI Aliocation Schedule Units Factor 25-DxP Distribution Plant RS 12'7,485,443 0.6125 sGS 39,497,241 0.1 898 LGS 6,9t6,309 0.0332 ws r,193,931 0.0057 LCI-D 23;700,078 0.i139 LCI-DS 9,347,360 0.0449 Total 208,140,3ó1 1.0000 26-Gp Gross Plant RS 142,720,936 0.5989 sGS 44,411,5'74 0.1 864 LGS '7,727,906 0.0324 ws 1,570,241 0.0066 LCI-D 26,464,881 0.tt1l LCI-DS 15,418,031 0.0647 Total 238,313,569 1.0000 27-NP Net Plant RS 82,603,979 0.6005 sGS 25,680,500 0.1 867 LGS 4,479,582 0.0326 ws 876,079 0.0064 LCI-D 15,419,788 0. I 121 LCr-DS 8,504,t52 0.0618 Total 137,564,081 1.0000 28-RB Rate Base RS 49,434,717 0.6095 scs 16,699,461 0.2059 LGS 2,857,808 0.0352 ws 1,237,260 0.0153 LCI-D 7,298,984 0.0900 LCI-DS 3,576,355 0.0441 Total 81,104,586 1.0000 29-REV Revenue RS 1 18,649,348 0.6698 sGS 39,866,430 0.2251 LGS 6,868,616 0.0388 ws 4,793,350 0.0271 LCI-D. 5,87',7,'74',1 0.0332 LCI-DS 1,084,9?5 0.0061 Total 177,140,466 1.0000 3O-LABOR Labor Direct RS 6,67s,698 0.6702 SGS 1,951,81s 0. i 960 LGS 1)1 7oo 0.0228 WS 51,329 0.0052 LCI-D 679,998 0.0683 LCI-DS 374,17't 0.0376 Total 9,960,31't 1.0000 HOPE GAS,,INC., dba DOMINION HOPE EXHIBIT PPS-I CLASS COST OF SERVICE STUDY SCHEDULE 8 CASE NO. 08-1783-G-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Unis Factor 3l-O&MxPG oaM RS 14,545.0t9 0.6939 Excluding A&G and SGS 4,193,826 0.2001 Purchased Gas LGS 405,926 0.0194 WS 87,6't4 0.0042 LCI-D 1,220,706 0.0582 LCI-DS 509,453 0.0243 Total 20,962,604 1.0000 32-C&OMxPG O&M RS 0.4202 50% Comnrodity SGS 0.t267 50%O&M Excluding A&G LGS 0.01 63 and Purchased Gas WS 0.0060 LCI-D 0.0720 LCI-DS 0.3588 Total r.0000 33-O&M o&M RS 98,886,804 0.6502 sGS 34,403,809 0.2262 LGS 5,401,531 0.0355 ws 4,45r,618 0.0293 LCI-D 4,903,249 0.0322 LCr-DS 4,042,741 0.0266 Total 152,089,751 1.0000 34-PGA Purchas Gas Adjustment RS 8t,187 ,732 0.6584 Revenue less B&O scs 29,224,310 0.23'70 LGS 4,859,293 0.0394 v|/s 4,295,821 0.0348 LCI-D 3,148,643 0.0255 LCI-DS 600,652 0.0049 123,316,451 1.0000 35-O&MxPG O&M Less Purchased Gas RS 17,227,438 0.6140 sGS 5,009,730 0.1 786 LGS 514,009 0.0183 ws 130,842 0.0047 LCI-D 1,736,3t5 0.0619 LCI-DS 3.438.599 0.1226 28,056,933 1.0000 óo.o¡Ès5 FJÊ EÊh !E iaì XOEiÉ tÐ u) v) N N6 s svNo O\e æ hO\ F-hæ o æO\ ó ñ O\ So <- el\o æ Þ- no æv \o oa s c.t C-æ þo\ t'- 69 N OO O æ æ ôìeì S o\ SO\ a $ N\O O\o N N\O F- oo nÉo h h ¡-- ôì !+ æo r\o ó th SNÕ cl rl-oÈ\ c) \o Oó trl F- $^q æ^\ c.], '-i q \o æo \Dæ o\ t'- o C.¡ 6 ÈO\ N rrl È cl 9È d *= c.¡ 6 ÕO Oór¡ ô óæ \ô ('- $ s o\æ t-- sæ 9fþ s æ e.¡ O¿ôä¡< U) h hN Ò € \oo F- 6 o 6\ rî sr: \d \d ñ od \oo F- ¡ sd c{ o\ o\ (¡\ .IXYJZnå8 R'R? 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Ër*E€€Ë ËËËE€Ë Ë.ÉÉt* E Ê\J ,3å9,3SËË Eå,3ËÉË 3å€ËÈ å 'oo HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS.1 CLASS COST OF SERVICE STUDY SCHEDULE IO cAsE NO. 08-r783-G-427 CALCULATION OF BASE BALANCING CHARGE St¿te Income Tax 8,172 Federal Income Tax 2,614,110 Net Operating Income 4,411,932 Subtotal 't,034.214 Rate Base 8t,I04,586 Rate 8.67% Storage Gas _24ß16206 Return & Taxes 2,151,565 O&M Gas Purchasing -0- Total 2.151.565 Sales & Imbalances rt,77s,082 Base Rate Balancing per Mcf s0.1 83 Base Rate Balancing per Dth s0.1 69 HOPE GAS, INC., dba DOMINION HOPE EXHIBIT PPS-I CLASS COST OF SERVICE STUDY SCHEDULE 1 I cAsE NO. 08-1783-G-427 CALCULATION OF CUSTOMER CHARGE Rate Schedule RS SGS LGS (i) (2) (3) $ s$ State lncome Tax 4,991 1,686 289 Federal lncome Tax 1,593,360 538,251 92,112 Net Operating Income 2,689.249 908,4s0 155,465 Total 4,287,600 1,448,387 247,86s Rate Base 49,434,7t7 16,699,461 2,857,808 Rate 8.67% 8.67% 8.67% Customer Reiated Rate Base Services 30,9s7,662 5,921;417 409,190 Meters 4,692,450 2,455,313 78,450 Meter lnstallations 8,020,029 925,718 7,332 House Regulators & Installations 3,071,387 262,079 819 Gross Plant - Customer 46,74r,529 9,564,527 495,791 Accumulated Depreciation 1 9, I 90,003 3.926.772 203.s50 Net Plant - Customer 2'7 ,551,526 5,637,755 292,24r Return and Taxes 2,389,6ts 488,977 25,347 o&M Meter & House Regulator Expense 1,455,848 336,028 7,988 Customer installation Expense 224,048 I 9,i 18 60 Services 81,972 1s,679 1,083 Meter & House Regulator Maint Customer Accntg. Less Uncolls. 2,819,741 705,870 18,231 Depreciation Services 987,549 188,893 1 3,053 Mete¡s & lnstallations 284,965 67,339 i,59s House Regulators & lnstallations 76,785 6,552 20 Tot¿l 8,320,s24 1,828,456 6'7,37'7 Average Customer Count 105,052 8,964 28 Customer Charge Before B&O Taxes 6.60 17.00 200.53 B&O Factor 1.044823 1.04r'.823 1.044823 Monthly Customer Charge 6.90 I7 .76 209.s2 uD-T o¡ Þ¡ rrr F5Þi.ì EÊ g)ØXL) \o \o a.l a-óF- (l Êc{ ê\ 6l- e.l \O m æ \o¡- ç v) o:q o\ \æ^-1 mô¡ f I-.t o\ O\+r¡ drî F.- s hæ ó m\oõl O\=fvj t-- C) sô- vl+ôr rl FI oF- F- æ\os O\ Þ-æ ìis ê\ cî æ mSt-. \oæ * L.l o- æ- o\ q.Ìq o^ r-- cl o^q s \o 69 tt- C- Z\ $o\ h s\oôt o No \o ho .+ aoc\¡ t--* cl æ .+ N!' æ SÉÉ a.¡ O\ r) r+ d NG¡ O\ Ormm $ æS ¿ga c\È t'r N\Orl o Oç tio It-' È \o oorl o \ê ç f\* \i od\drî ñ ñ -f \fv Eo & o €sãÈE ,b *. H o çËÉotìÉca E o'!. 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ÐTRECT.TEiSTIVT{,ìNY PREP.ITRE]Ð BV . FA.{.}L P. STÐWART ll oN BEETALF'OF ]TE{E UTILTTTES T}TVTSTON *****¡** May 14,20fi9 B tsxnlull aP E .-'t 201 Brooks Street, Cha¡leston, VVV 25301 àô d./5 a sr pøl Page No.1 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart 1 a. Please state your name and business address. 2 3 A. My name is Paul P. Stewart and my business address is 506 17ft Street, 4 Dunbar, West Virginia. 5 6 a. By whom are you employed and in what capacity? I 8 A. I am currently self-employed and I am performing work for the Utilities 9 Division of the Public Service Commission of V/est Virginia under contract as 10 a vendor, Paul Stewart Consulting, LLC. 11 L2 a. Please briefly state your educational and professional qualifications. t3 I4 A. I graduated from V/est Virginia St¿te College with a Bachelor of Arts Degree 15 in 1969 and received a Master of Business Administration Degree from the 'West 16 Virginia College of Graduate Studies in 1979. I was employed by the 77 Public Service Commission of V/est Virginia from September 1973 through 18 October 2008. I was Deputy Director of the Utilities Division at the time of my T9 retirement. Over the course of my career with the agency, I prepared and/or 20 supervised lhe preparation of Rule 42 Exhibits, class cost of service studies, 2T cost of capital studies and various other reports for presentation before the lof15 Page No.2 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P, Stewart I Public Service Commission of West Virginia. I have presented expert witness 2 testimony in various matters concerning telephone, natural gas, electric, water J and sewer utilities as well as regulated motor cariers and solid waste facilities. 4 5 a. What is the purpose of your testimony in this proceeding today? 6 7 A. The purpose of my testimony is to present the Class Cost of Service Study 8 (CCOS) and the resulting class revenue requirements and rate design 9 recommendations in the case on behalf of the Utilities Division. 10 11 a. What is the purpose of a class cost of service study (CCOSX L2 1,3 The purpose of a CCOS is to develop a general set of cost profiles by class of T4 customer and/or rate schedule which may be used as a guide to the assignment 15 of revenue responsibilities to those groups of customers. The results of the L6 study can then be used as a guide to design rates for the va¡ious groups of T7 customers which will recover costs approximating the general class cost 18 profiles developed. Although a variety of approaches and philosophies may be t9 used to develop approximations of cost responsibility by customer class or rate 20 schedule as can be seen by comparing the details of the studies presented by 2T Hope Gas, Inc. (Hope) , CAD and Staff in this case, the three CCOS have 2of15 Page No.3 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart 1 common elements. The first step is to functionalize costs based on the basic 2 physical elements of a natural gas utility operation: gathering, storage, 3 transmission and distribution. The second step is to classify the functionalized 4 costs as demand, commodity or customer related. The final step in the 5 development of a CCOS is to allocate the total of all costs to customer classes 6 using direct assignments, primary factors such as contribution to peak demand, 7 and composite factors which flow from application of the primary factors. 8 9 a. Has the Commission approved any specific methodology for development of a l0 CCOS for Hope Gas, Inc. previously to this case? 11 T2 A. Yes. By order in Case No. 93-0004-G-42T, entered October 23, t993, the T3 Commission approved a specific cost and revenue allocation methodology for 14 Hope. 15 t6 a. Please explain how that Commission order relates to the issues in this case? T7 18 A. In the 1993 case the Commission ruled that Administrative and General 19 (A&G) expenses should be allocated 5OVo by throughput and 507o based on 20 Operation and Maintenance expenses excluding A&G. The Commission found 2L that a large portion of A&G expenses represents general overhead costs that 3of15 Page No.4 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart I cannot be specifically identified as related to the provision of service to either 2 sales customers or transportation customers. Accordingly, because most of J Hope's O&M expenses, excluding A&G, are allocated to sales customers, a 4 methodology which does not include throughput in the development of an 5 A&G allocation factor will result in sales customers bearing responsibility for 6 an unreasonably large share of A&G expenses. 7 8 a. Does the CCOS presented on behalf of Søff reflect the methodology specified 9 by the Commission in Case No. 93-0004-G-42T with regard to the allocation 10 of A&G expenses? 11 L2 A. For the most part Staff s CCOS does reflect the methodology specified in the L3 Commission's 1993 order. In the Staff CCOS all A&G expenses except T4 Employee Pensions and Benefits were allocated using Ståff Factor 32- 15 C&OMxPG which is a composite factor derived by weighting Commodity and t6 O&M expenses, excluding purchased gas, equally. Staff allocated Employee 17 Pensions and Benefits based on the distribution of direct labor. Unlike most 18 other expenses included within A&G, Employee Pensions & Benefits are T9 tracked well by direct labor. Accordingly, the use of this allocation 20 methodology results in a greater degree of internal consistency than would 2T have application of a 50/50 Commodity/O&M factor. 4of15 Page No.5 Case No.08-1783-G-427 DIRECT TESTIMOI{Y OF: Paul P. Stewart 1 2 a. Does the CCOS presented on behalf of Hope reflect the methodology specified 3 by the Commission in Case-No. 93-0004-G-42T with regard to the allocation 4 of A&G expenses? 5 6 No. The methodology used by Hope to allocate A&G expenses does not 7 reflect the use of throughput at all nor does it reflect the distribution of O&M 8 expenses generally. A&G expenses in Hope's CCOS are allocated by a 9 composite factor based its allocation of Customer Accounts Expense, 10 Customer Services & Information Expense and Sales Expense which factor is 11 heavily weighted by number of customers. T2 t3 a. Does the Staff methodology reflect the use of the 50/50 Commodity/O&M t4 allocation factor elsewhere within its CCOS? 15 16 A. Yes. The 50/50 Commodity/O&M factor was also used to allocate General T7 Plant and Accumulated Depreciation of General Plant within rate base and as 18 well as to allocate General Plant depreciation expense. As with A&G expense, t9 the amounts recorded in these accounts are representative of general overheads 20 which cannot be specifically identified with provision of service to either sales 2t customers or transportation customers. To allocate these costs in the same 5of15 Page No.6 Case No. 08-1.783-G-427 DIRECT TESTIMOITIY OF: Paul P. Stewart 1 manner as A&G expenses is consistent with the Commission's 1993 order in n that it achieves a reasonable sharing of these costs among sales custsmers and J transportation customers. By way of contrast, Hope's CCOS allocates General 4 Plant costs by net distribution plant. 5 6 a. Is the manner is which Staff allocated customer related plant costs in this case 7 consistent with the methodology which was used in Staff's CCOS in Hope's 8 last general rate case, Case No. 05-0304-G -42T? 9 10 A. Yes. As in Case No. 05-0304-G-42T, Staff's CCOS allocates services using 11 factor 2l-CUSTNC which represents a 50/50 weighting of number of L2 customers and non-coincident peak in order to reflect that overall costs tend to T3 be higher on a per customer basis for larger customers. However, that T4 allocation factor has been modified from last case to exclude industrial 15 customers in light of Hope's clarification that all such costs for industrial t6 customers are recorded in Account No. 385, Industrial M&R Equipment. Also t7 in this case Staff has again adopted Hope's factors and methodology to allocate 18 meters and installations which are based on number of customers weighted by t9 investment costs. 20 2L a. Do Staff s allocation factors reflect weather normalization? 6of15 Page No.7 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart I 2 A. Yes. The test year data from which the factors related to sales volumes and 3 contributions to peak were calculated have been adjusted to reflect the weather 4 normalization adjustments made by Staff in its Rule 42 Exhibit. 5 6 a. Was the allocation of storage gas developed in this case consistent with the 7 methodology applied by Staff in Hope's 1995 general rate filing? 8 9 A. Yes. Once again storage gas was allocated using Factor 5-SIMB which 10 represents annual sales plus daily balancing volumes. This is in recognition 11 that the existence of storage capacity also gives the utility the ability to T2 accommodate imbalances that occur between transportation deliveries of gas L3 and actual gas usage on the parts of those customers. These imbalances occur T4 because of daily over and under deliveries, and the resultant use of the storage 15 capacity occurs in order for the Company to be able to balance these daily over t6 and under deliveries on behalf of transportation customers. Transportation T7 customers share in the benefits of that capacity even though the natural gas 18 held in storage was not nominally purchased in order to facilitate service 19 provided to them. Absent the Company's purchase and storage of gas to serve 20 the sales customers, physical delivery of transport gas service would not be 2t seamless for the transportation customers. 7of15 Page No.8 Case No.08-1783-G-427 DIRECT TESTIMOITW OF: Paul P. Stewart I Q. How does the CCOS presenled in this case differ from the one presented in the 2 previous case in terms of the handling of purchased gas revenue and expense? 3 4 A. Consistent with the manner of presentation reflected in St¿ffls Rule 42Bxhtbit, 5 the CCOS contains purchased gas expense and revenue. On Schedule 5, 6 Operation and Maintenance Expenses, Gas Supply has been broken into Gas 7 Supply - Purchased Gas and Gas Supply- Other to reflect purchased gas 8 expense as a separate item. The item Gas Supply - Purchased Gas also 9 contains purchased gas expenses which had been recorded in Transmission, 10 Mains and Services, and Other Distribution Expense. Gas Supply - Purchased 11 Gas was allocated in accordance with purchased gas revenue as shown on 12 Schedule 4, Operating Revenues, in order to achieve consistent conespondence T3 between purchased gas expense and revenue on a class basis. This approach 74 will also assure that rate design will clearly separate purchased gas costs from L5 the margin (base rate) component of Hope's rates. 1,6 T7 a. Please summarize the format of Staff's class cost of service study and the 18 results of that study. 19 20 A. Exhibit PPS-I is based on and reflects Staff's Rule 42 Exhibit and 2L recommended revenue requirements under the scenario of no change in 8of15 Page No.9 Case No.08-1783-G-427 DIRBCT TESTIMONY OF: Paul P. Stewart 1 Company ownership. Schedule I is the'summary of revenue requiremcnts as 2 reçommended by Staff and Schedule 2 is a summary of Hope's achieved rate J^ of return. Schedule 3 shows rate base as allocated to customer classes. 4 Schedule 4 shows class revenues. Schedules 5, 6, and 7 show the allocation of 5 Operation and Maintenance Expense, Depreciation and Other Taxes, and 6 Income Tæ 7 the study and Schedule 9 shows the development of the labor allocator. 8 Schedule 10 shows the calculation of the base balancing charge, Schedule 11 9 shows the calculation of the indicated customer charges, Schedule 12 shows 10 the margin class cost analysis, and Schedule 13 shows the fully distributed 11 transportation analysis. T2 t3 a. What is Staff 's overall revenue reconÌmendation? T4 15 A. Staff is recommending an overall revenue decrease of $1,112,425 as reflected T6 -on Exhibit PPS-I, Schedule 1, Sheet 1 of 3. (The decrease amount of t7 5I,1.12,406 shown on PPS-I, Schedule 1 is the result of rounding error.) t8 Revenue decreases are indicated for the Residential (RS). Large General T9 Service (LGS) and Wholesale (WS) customer classes. Revenue increases are 20 indicated for the Small General Service (SGSI and the Large Commercial and 2T Commercial (LCI-D and LCI-DS) customer classes in the amounts of 9of15 Page No.10 Case No.08-1783-G-427 l DIRECT TESTIMONY OF: Paul P. Stewart I $202.346. $1.518.744 and $561.161. respectively. Staff is recommen4ing that 2 the rates remain unchanged for these three classes (SGS. LCI-D and LCI-DS). J and that the total reduction of $1.112.425 be allocated proponionatel]¡ to the 'WS) 4 other ttree classes (RS. LGS and where reductipns are indicated. This 5 approach would apply the concept of gradualism towards eventually realigning 6 fully the various classes' relative revenue responsibilities while easing the 7 burden of that realignment to the classes requiring increases. This approach is I consistent with Commission practice in past cases. 9 10 a. Is Staff recommending any increases and decreases in customer charges for the 11 RS, SGS, and LGS classes as indicated on Exhibit PPS-1, Schedule 11? L2 13 A. No. Although a decrease is indicated for the RS class and increases are 14 indicated for the SGS and LGS classes, the current charges are generally 15 reasonable. Accordingly, it is recommended that the decreased overall 16 revenue responsibilities of those classes be implemented through reductions in 17 commodity charges. 18 t9 a. What is the purpose of PPS-I, Schedule 12? 20 l0 of 15 Page No.ll Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart 1 A. This schedule shows the results of the margin (base rate) cost analysis. It 2 represents the allocation óf all costs excluding those related to the elements of J purchased gas expense. In previous str¡dies this schedule would been the first 4 page of the CCOS. This schedule reflects the base revenue responsibilities of 5 each of the customer classes. It yields the same results in terms of increases 6 and decreases on a class basis as found on Schedule 1 (subject to rounding 7 error) and serves as a proof of the accuracy of Schedule 1. 8 9 a. What is the purpose of Schedule 13? 10 11 A. This schedule shows the fully distributed transportation analysis. It was T2 developed in the same manner as Schedule 12 but goes the additional step of T3 excluding all coast related to gas production and storage. Staff recommends t4 that the transportation rates be established based on this cost analysis. In 15 addition, it is recommended that the incremental revenue generated on 16 transportation volumes charged at rates flexed to full margin be credited back t7 to the classes on the basis of the differential in the operation and maintenance 18 expenses between fully distributed transportation and full margin class cost of 19 service studies. 20 ll of 15 Page No.12 Case No.08-L783;G-427 DIRECT TESTIMOITIY OF: Paul P. Stewart I Q. What is Staff recommending with respect to rate design for special contract customers? J 4 A. Staff is recommending that the rate design initially reflect the revenue from the 5 special contract customers at their non-discounted rates. Staff believes that 6 the Company must demonstrate that any revenue shortfall from a fully 7 distributed cost of service is clearly justified. If the Company justifies a S flexed-down revenue level, the difference should be spread back to non-special 9 contract customers based on the relative revenue requirements of the individual 10 classes. 11 12 a. Except for the rate related items discussed above, does Søff disagree with any 13 of the Company's proposed tariff changes? T4 15 A. Yes. Staff objects to the WNA, Weather Normalization Adjustment, and to PR 16 Rider, Pipeline Replacement Rider. I will address the weather normalization t7 issue. The PR Rider will be addressed in the testimony of Staff witnesses 18 Sprinkle and deGruyter. t9 20 a. Please continue. 2l 12of 15 Page No.13 Case No.08-1783-G-427 'DIRECT TESTIMOI{Y OF: ,Paul P. Stewart A. Staff recommends that the Weather Normalization Adjustment be denied because the Company has offered no supporting testimony or exhibits which would permit Staff to evaluate its impact either on customers' bills or the earnings of the Company, much less the mechanics of its calculation or 5 application. The testimony of Mr. McKeown on behalf of Hope references 6 Case No. 07-2230G-PC, Blacksville Oil 8L Gas Company, et al. The Commission order in that case approved a weather normalization pilot program for which eight small gas utilities are eligible, and he asks that Hope be 9 permitted to join that program. Although his testimony indicates that the 10 weather normalization adjustment would be based on va¡iances in heating t1 degree days (HDD) as measured against a base year, exactly how the annual T2 adjustment would be calculated is not discussed. Likewise, the separate 13 petition requesting approval of the WNA attached to Hope's filing states that l4 the proposed WNA is "similar" to that approved in Case No. 07-2230-G-PC, 15 but does not explain the ways in which it is "similar" nor, perhaps more 16 importantly, how the proposed WNA is different. My experience preparing t7 Staff's testimony in Case No. 07-2230-G-PC and developing the methodology 18 ultimately adopted to calculate the WNA in that case indicates to me that there T9 are a lot of different ways to calculate a WNA which may be "similar" in appearance but which may lead to somewhat different results. 2T l3 of 15 Page No.14 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart I a Beyond the absence of detail submitted in support of the WNA, are there other 2 concerns with Hope's request? 3 4 A. Yes, there are. The WNA process approved in Case No. 07-2230-G-PC is a 5 small gas utility "pilot program" the results of which have yet to be evaluated. 6 . Hope is not a small utility by West Virginia standards. The owners of those 7 eight small utilities which are eligible to participate in the program receive 8 income from those utilities primarily in the form of salaries as 9 officers/managers rather than through dividends paid as return on investment. 10 Their access to capital markets are far more restricted than is Hope's. V/hen 11 recommending that the WNA be approved for those companies, Staff was T2 more concerned with their cash flow requirements than their nominal returns t3 on equity. Before approving a WNA for a larger investor owned utility such as t4 Hope, the Commission should consider the degree to which the WNA will 15 "guarantee" that the Company will fully recover its awarded margin, regardless 16 of sales levels, and whether that reduction in volume related risk is sufficient to t7 require a discrete adjustment to reflect reduced overall risk when awarding a 18 return on equity. Nothing has been submitted in support of the WNA which T9 begins to address this question. 20 2l a. Does this conclude your testimony. 14of 15 Page No.15 Case No.08-1783-G-427 DIRECT TESTIMONY OF: Paul P. Stewart 1 2 A. Yes, it does. 3 l5 of 15 ir*óô- ¡'r l! HJr-' FJ- ñaH ã r¡ì ¡rJ *r ;li H lr)ØØX(J!E sÉ h coó \os O\ ço e{s ç l-- õ¡ :\Oô¡ N ôIAO ôl o s Ê O\ ¡t- F- 6óç \o- t-. ó vl\ f Ç.e \d od nl'-ÈS e\ì oæ O rÊ Or rìn\O ôló O\ F.. I oq vl trl vl \o r¡ \ON ó -'1 hÉ l-- h t-r 2 o\ ôl ¡-. oro\ l- Scn oôl rÐ, ¡.. m S OOcì o Ns sç \Ô t'- r+s {v f 6 oal æ r@ Éi c.¡ F Ñj .d Fv t-r Ë & €o oox}E =ØGx s- I !rÐo(: ç b o'E. o Ë Ë õsË Êa ,'ã- .s EÈã Ë g =o.-õ:ÉovÈ e_ 'D .=¿É E XÈ S EtE É ËiÊ P å E E9 É eõu Ë 's'sËs .= fr 5ì .õ EËã H Í ã? 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Él ;f rô Sln(.l ôl æt ìr¡ æ tô t-- rô\q € v)l óe r- coO\rô O\r) úrÊ l'- O (.¡ (\ì lr O ov \O- Òl æ- tt: oÕ NÊÓ C.l (\¡ Ê "l æ O(f¡f,- F-d ul F- I ot_l dl o¡ ÔI ôl ,o Êq Ë' É' ã ã Eã Pã t-- !+\Oç \o hô\ô st È\-F- O o\ñô Àg+ rt ooôÐ\o* g+lä Êl È.- ôl \o o s*|fll Þ-h Ë sleg|$a*¡- ä^eã3t i * Ë*"È .ã -*¡fr e, { Ë E E ÈçEY E FþË.T F å *u* ã åË?uË¡t EËF Ër¡ g gïË å åÄË ËËËi3ËË ËËË HOPE cAS, INC;, dba DOMINION HOPE EXHIBITPPS-I CLASS COST OF SERVICE STUDY SCI{EDULE 8 cAsE NO. 08-1783-c-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Raæ Total Allocation Number Allocation Schedule Units E+* l-coM Commodity RS 'r,775,733 0.3851 (InMCÐ SGS 2,827,333 0.1400 LGS 705,38'l 0.0349 ws 409,646 0.0203 LCI.D 4,556,446 0.22s7 LCI-DS 3,914,519 0.1939 Total 20,189,065 1.0000 2-COMH Commodity-Hi Pressure RS 7,429,8s5 0.4737 (In MCÐ scs 2,784,058 0.1775 LGS 720,179 0.0459 WS 118;282 0.0075 LCI-D 4;632,702 0.2954 LCI-DS Total 15,685,076 r.0000 3-COML Commodity-Lo Pressure RS 7,429,85s 0.6795 (In MCÐ sGs 2.784,058 0.2546 LGS 720,'.179 0.0659 ws LCI-D LCI-DS Total t0,934,092 1.0000 4-SALES Annual Sales RS 7,775,733 0.6710 (InMCÐ SGS 2,720.691 0.2348 LGS 428,053 0.0369 ws 409,646 0.0354 LCI-D ,ç? o?? 0.0219 tcI-Ds Total l r,588,055 1.0000 5-SIMB Annual Sales RS '7,775,733 0.6604 Imbalances sGs 2,769,248 0.2352 MDV LGS 443,t19 0.0376 (In MCÐ ws 409,646 0.0348 LCI-D 319,783 0.0272 IÆI-DS 57,553 0.0049 Total r1,775,082 1.0000 6-DTS Demand RS 66,753 0.5208 Average Day Peak SGS 24,112 0.188r Transmission & Storage LGS 4,252 0.0332 ws 3,749 0.0292 LCI-D 18,639 0.1454 LCI-DS 10,678 0.0833 Tot¿l r28,183 1.0000 . HOPE GAS,INC., dba DOMINION HOPE EXHIBTT PPS-1 CLASS COST OF SERVICE STUDY SCHEDTJLE 8 cAsE NO. 08-1783-e427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor 7-DH Demand RS 62,508 0.5723 Average Day Peak sGs 22,959 0.2102 High Pressure Dist LGS 4,040 0.0370 ws 1.082 0.0099 LCI-D 18,639 0.1706 LCI-DS Total t09,228 1.0000 8-DL Demand RS 62,508 0.6984 Average Peak Day scs 22,9s9 0.2565 Low Pressure Dist LGS 4,040 0.0451 (In MCÐ ws LCI-D LCI-DS Total 89,507 1.0000 9-MMR Meter & RS 105,052 0.9190 M&R Stations sGs 8,964 0.0784 LGS 7t 0.0006 lVS 49 0.0004 LCI-D t33 0.0012 LCI-DS 36 0.0003 Total 114,305 r.0000 1O-IMR lndustrial RS M&R Stations SGS LGS \ryS LCI-D 37 0.7708 LCI-DS 11 0.2292 Total 48 1.0000 II-METR$ Meters $ RS 3,940,405 0.6422 sGs 2,061,807 0.3360 LGS 65,877 0.0107 ws 29,707 0.0048 LCI-D 38,380 0.0063 LCt-DS Total 6,136,t76 1.0000 12-METRI Meter Installations $ RS 6,206,176 0.8950 SGS 716,353 0.1033 LGS 5,674 0.0008 ws 3,916 0.0006 LCI-D 2,47',| 0.00()4 LCI-DS HOPEGAS,INC., dba DOMINION IIOPE EXHIBITPPS-I CLASS COST OF SERVICE STUDY SCHEDULE 8 cAsE NO.08-1783-c427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor Total 6,934,596 1.0000 I3-CUST Customers RS 105,052 0.9206 sGs 89@ 0.0786 LCS 28 0.0002 ws t2 0.0001 LCI.D 40 0.0004 LCr-DS l1 0.0001 Total t14,lo7 1.0000 14-CUSTI Customers RS Industrial sGs LGS ws LCI-D 37 0.7708 LCI-DS ll 0.2292 Total 48 1.0000 I5-CUSTRG Customers RS 105,052 0.9210 Residential & General sGs 8,964 0.0786 LGS 28 0.0002 WS l2 0.0001 LCI-D J 0.0000 LCr-DS Toøl 1t4,059 1.0000 I6-CUSTS Sales Customers RS 105,052 0.921't SGS 8,883 0.0779 LGS l8 0.0002 ws t2 0.0001 LCI-D 14 0.0001 LCI-DS Total tt3,979 1.0000 17-CDTS Commodity 507o RS 0.4530 Demand50Vo sGs 0.1641 Trans & Storage LGS 0.0341 Factors I & 6 ws 0.0248 LCI-D 0. I 855 LCI.DS 0.1386 Total 1.0000 l8-cDH Commodity 507o RS 0.5230 Demand 507o sGs 0. r938 High Pressure LGS 0.0415 Factors 2 & 7 ws 0.0087 LCI-D 0.2330 LCI-DS HOPE cAS,INC., dba DOMIMON HOPE EXHIBITPPS-1 CLASS COST OF SERVICE STUDY SCHEDULE 8 CASE NO. 08-1783-c427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor Total r.0000 1g-CDL Commodity 507a RS 0.6889 Demand 507o SGS 0.25s6 Low Pressure LGS 0.0s55 Factors 3 & 8 ws LCI.D LCI-DS Total 1.0000 20-PEAKNC Commodity (Mcf) RS 68,433 0.5933 Avg Three-3 Day Peak sGs 25,061 0.2173 By Customer Class LGS 2,368 0.0205 (Non-Coincidental) ws I,189 0.0103 LCI-D 18,293 0.1586 LCI-DS Total n5,344 1.0000 2l-cusTNc Customer 507o RS 0.8r30 Non-Coincinde nral P eak 5O7o sGs 0.1685 Factors 13 & 20 LGS 0.0123 Excl. Industrials ws 0.0062 LCI-D LCI.DS Total 1.0000 22-MAINS Mains $ RS 82,037,531 0.586s l,ow & High .sGs 30,418,432 0.2t75 LGS 6,550,192 0.M68 ws 753,137 0.00s4 rcI-D 20,1 15,983 0.1438 LCI-DS Total 139,875,275 1.0000 23-MS Mains & Services $ RS 1r6,090,026 0.6387 sGs 37,475,880 0.2062 LGS 7,066,328 0.0389 lryS t,ott,9l7 0.00s6 LCI-D 20,1 15,983 0.1107 LCI.DS Total 181,760,134 1.0000 24-MTRHR Meters & House Regulators RS 15,783,866 0.8052 sGs 3,&3,lto 0.r 858 LGS 86,601 0.0044 ws 40,788 0.0021 LCI-D 48,994 0.0025 LCI-DS HOPE GAS,INC., dbaDOMIMON HOPE EXHIBMPPS-I CLASS COST OF SERVICE STUDY SCTIEDI.JLE 8 cAsE NO. 08-1783-c-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Total Allocation Number Allocation Schedule Units Factor Total 19,603,359 r.0000 25-DxP Distribution Plant RS 134,565,286 0.6/¡65 scs 42,116,562 0.2023 LGS 7,366,245 0.0354 ws 1,097,598 0.0053 LCI-D 22,620,229 0.1087 LCI-DS 373,4s7 0.0018 Total 208,139,378 1.0000 26-GP Gross Plant RS 152,029,883 0.6379 scs 47,8M,310 0.2008 LGS 8,368,422 0.0351 \rys 1,562,389 0.0066 LCI-D 26,376,127 0.1107 LCr-DS 2,131,454 0.0089 Total 238,312,586 1.0000 27-NP Net Plant RS 87,88r,607 0.6388 scs 27,627,606 0.2008 LGS 4,838,643 0.0352 ws 861,753 0.0063 LCr-D 15,258,375 0.1109 LCI-DS 1,095,114 0.0080 Total 137,563,098 1.0000 28-RB Rate Base RS 51,641,513 0.6367 SGS 17,514,018 0.2159 LGS 3,006,032 0.0371 ws 1,226,842 0.0151 LCI-D 7,179,704 0.0885 LCI-DS 536,493 0.0066 Total 81,103,603 1.0000 29-REV Revenue RS 118,675,579 0.6700 sGs 39,876,108 0.22st LGS 6,870,401 0.0388 ws 4,793,279 0.0271 LCI-D 5,876,946 0.0332 LCI-DS 1,048,154 0.0059 Total 177,140,466 1.0000 3O-LABOR Labor Direct RS 6,877,812 0.6905 SGS 2,026,s17 0.2035 LGS 242,888 o.0244 ws 53,391 0.0054 LCI-D 727,891 0.0731 HOPE GAS, INC., dba DOMINION HOPE EXHIBITPPS-1 CLASS COST OF SERVICE STIJDY SCHEDULE 8 cAsE NO. 08-1783-C-427 DEVELOPMENT OF ALLOCATION FACTORS Factor Basis For Rate Toøl Allocation Number Allocation Schedule Units Factor LCI-DS 3r,816 0.0032 Total 9,960,315 1.0000 3l-O&MxPG o&M RS 14,864,998 0.7091 Excluding A&G and SGS 4,312,411 0.2057 Purchased Gas LGS 429,136 0.0205 ws 87,427 0.0042 T¡I-D 1,256,383 0.0599 LCI-DS 12,249 0.0006 Total 20,962,605 1.0000 32-C&OMxPG o&M RS 0.547t 507o Commodity SGS 0,1729 50Vo O&M Excluding A&G LCS 0.0277 and Purchased Gas ws 0.0t22 LCI-D 0.1428 LCI-DS 0.o972 Total 1.0000 33-O&M o&M RS 100,234,720 0.6590 sGS 34,896,4s9 0.2294 LGS 5,5t7,171 0.0363 ws 4,503,173 0.0296 LCI-D 5,519,720 0.0363 LCI-DS 1,418,509 0.0093 Total 152,089,752 1.0000 34-PGA Purchas Gas Adjustment RS 81,187,,732 0.6584 Revenue less B&O scs 29,224,310 0.2370 LGS 4,859,293 0.0394 ws 4,295,821 0.0348 LCI-D 3,148;643 0.0255 LCI-DS 600,652 0.0049 123,316,4s1 1.0000 35-O&MxPG O&M Læss Purchased Gas RS 18,575,354 0.6621 scs 5,502,380 0.1961 LGS 629,650 0.0224 ws t82,397 0.0065 LCI-D 2,352,786 0.0839 LCI-DS 814,367 0.0290 28.056.934 1.0000 ã.^ À=oÞ. .'r E FÞ- ËHE tÈ!6ØXUIc l,,l m fr I g l5la * s 6lñrr ^lg t3t- I I I \O \tO rhÒ ô,1 llo\r æ NH ñ F- S t \ o- \o- r+- cj^ \oæEñ \olõ¡Xl= æ l8le* 3 õ¡ (1or¡O o ø d 6 orô ñ8Nl-\o -ls s æ Nt'.. lô-Ò I O\\O \tdh o\ñ öæ rtæ ;l^* s8 c\ È-t-- æ h \ô 8^g- È -lù 5 oï \oö N h o\ ô-áttr¡¡ 'elÞ19 -ict lñ ef 9X d El I l-o O O6€ I ô¡ óO\-O\ çltõ¡ \0 {æ O \ôlæ cr 3 æ +æ o ri l-- 8e ñ Rl8 $ Éi ññ \d ôî s ñ+ lÉî Fj cEsË Él-lçlql"- n \tÉ ô¡ o\loÕ €pq3 l- c\¡ æ6 N-ô + \o sto æc.¡+ O\Qæ \O o hælæ lN qim il O r¡F- OrÈ ra) (n F- \o lo\ ç c..i Éi + ui d t-. m hæ-i h-h û <î(!¡doï d ôilñlO\ ód ãËËã lul,- $ ô¡ô¡N æ s tr+ ñ U Eãfr I I t-: lô æh nô- æ ôlC.¡ * F\Ê o -l- gqsE E q elæ. æ.ôl\-+r ñ å3 R Slñ I o¡ O\r¡ Ot+€ o\ N F-ê¡ Oaór+ u-) dd od ñl-: d I l*1.- F È-ô¡ o c{æ S lF- 6 Aõ I I -Ê6 lÉl \ EI ó l- st I _t 9t & u9¿ø dl^ u) u) H. 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F Èi HËË U tr ¿ F ãU 9 qÈËi= Ét, g g k B.ã.o a E Ë ó ås å Ê óãõ ËE € 3åËË Ë "ã Eì- HOPEGAS;INC., dba DOMINION HOPE EXHIBIT PPS-1 CLASS COST OF SERVICE STUDY SCFIEDULE IO cAsE NO. 08-1783-c-427 CALCULATION OF BASE BALANCING CHARGE State Income Tax I,183 Federal lncome Tax 2,614,123 Net Operating Income 4,4t2,031 Subtotal 7,034,337 Rate Base 81,104,586 Rate 8.67Vo Storage Gas _24ßr6206 Return & Taxes 2,151,565 O&M Gas Purchasing -0- Toøl 2,151,565 Sales & Imbalances 1t,775,O82 Base Rate Balancing per Mcf $0. I 83 Base Rate Balancing per Dth s0.169 HOPE cAS, INC., dba DOMINION HOPE EXHIBIT PPS-I ' CLASS COST OF SERVICESTUDY SCHEDULE 1I cAsE NO. 08-1783-c-427 CATCI.JLATION OF CUSTOMER CHARGE Raæ Schedule RS SGS LGS (l) (2) (3) $ $$ State Income Tax 5,210 1,767 303 Federal lncome Tax 1,664,504 5æ,511 96,891 Net Operating Income 2,809,298 952,762 163,528 Toøl 4,479,013 I,519,040 260,722 Rate Base 51,64t,513 17,514,018 3,006,032 late 8.67Vo 8.67Vo 8.677o Customer Related Rate Base Services 34,052,494 7,057,449 516,136 Meters 4,692,450 2,455,313 't8,450 Meter Installations 8,020,029 92s,718 7,332 House Regulators & Itstallations 3,071,387 262,079 819 Gross Plant - Customer 49,836,360 10,700,559 602,737 Accumulated Depreciation 20,460,696 4,393,196 247.458 Net Plant - Customer 29,375,6Ø 6,307,363 355,279 Return and Taxes 2,547,834 547 ,055 30,814 o&M Meter & House Regulator Expense r,455,848 336,028 7,988 Customer installation Expense 224,048 19,118 60 Services 90,167 18,687 1,367 Meter & House Regulator Maint Customer Accntg. l,ess Uncolls. 2,819,741 705,870 18,231 Depreciation Services t,086,275 225,133 16,46s Meters & Installation's 284,96s 67,339 1,59s House Regulators & Installations 76,785 6,552 20 Total 8,585,663 1,925,781 76,540 Average Customer Count 105,052 8,964 28 Customer Charge Before B&O Taxes 6.8r t7.90 227.80 B&O Factor r.044823 1.044823 1.044823 Monthly Customer Charge 7.12 18.70 238.0r c.ì v) ê< ê< F co H X r¡) \o* F- \OmÞ- \fcl (t) Ê\O C- hOæ 6 r|O\ â ô* c.t æ- \o- vl ..I f\d æ æhF- \O F- É,9 É\O l'- õl t-- t'- O lfh ôæ N + ".t æs ó \OÊÈ- O\ l+m ..¡ tt- O F-\Oñ .I Næ ! õl t-- o mo\Þ \O tt- m \o 99 6od q) oÈo e.l O F\Ê O\ O\(ôo õlñ I rr .ql o- q\Þs \o ôl ôlÊ $ (..¡ 2 ô¡ Ê. \O C- o\ tr- rÐi oó l- NON o als$m E ho l+ çtN s- ã> (/) ñd a'l O\Éh \o o\ !dê À h €'9 F- ôl h l--tfN oó '7?, Ð o F sÊ 9Eìã Ë o O\ F. c.ì sf *o\ r) !+\ÞO\ \O oó ho OOO\ cl ooN c\q æS çÊo\ 6 d ô,1 (\ oîqiñ .r¡ od+ o O\* t'-9ì N\Oh m t< \-i \Þ ooh o \o t-\ È oá\drî ñ ñ lfv s'd c.ì E ú0) E -Ð>ØO =ø€ooi ,9tsÞ.o L û.Þ=-É :ài Ëõ o€o €o .Ë Ë ÞñÉ c0 äg å ËEE Ë * Ë HEoEJ.,= e 'ãìs È xÊ E å'= gs >:Ë .ä TË Ë E lP Ë€c E Ëg :€ " 5 ËH ü ËE? ,i Ê; Å A Ë .BÈËfåÂ'.Ë 2 EË p ËË v) F Êa X r¡ F-. æ n o n N rô ôo N ç ê\ U) ÊC\\Þ o\ q\o ÈF-O\msô.t \o vc) -¡ ; ç H OO e.¡ ó s C- (å ñrî o ænc\ c¡\ Èæ ôl æ C) sh o\ooç\ N¡ h\o 9 î,2P rô HOHr¡. 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"F f-I.l. ñ r_f 71 #, !2?i &* l-"' ofrt .:j \,.. zg t¿) -f3 Case Nos. 08- I 783-G-42T &, 08- 1761-G-PC Hope Gas, Inc., dba Dominion Hope { .4,1 -i-r r.-0 PREPARED DIRECT TESTIMONY OF r(.'-: r¡'r f_t PtJ ERIC F. deGRUYTER c).--. 4 --i r \) ii {s/- ENGINEERING DIVISION Þ¡r- laa¡l <.: ¡ Ut=:*t: _.\_ _( J ¡l G¡.rt tr) i---; ON BEHALF OF THE STAFF OF THE zc, \,+' Cf c) PUBLIC SERVICE COMMISSION OF WEST VIRGTNIÆ r3l ****{<* (fl .< N ËF Ë Æ ã ffi't April 24,2009 Þ=Èf8p Á' :¡¡3r- f\) ;;Õ 3Ësïä<ã"' -E ¡Ï1 ì¡u ra s t Ft m *.¡ t¿, ö =ã F 201 Brooks Street, P. O. Box 812, Charleston, WV 25323 CASE NOS. 08-1783-c-42T & 08-1761-c-pc TESTIMONY OF ERIC F. deGRUYTER PAGE NUMBER I 1 A. PLEASE STATE YOURNAME, OCCUPATION AND BUSINESS ADDRESS. 2 3 A. My name is Eric F. deGruyter. I am employed by the Public Service Commission of 4 West Virginia as a Technical Analyst in the Engineering Division. My business 5 address is P.O. Box 812, Charleston,'WV 25323. 6 7 A. HOW LONG HAVE YOU BEEN EMPLOYED BY THE COMMISSION AND I WIIAT ARE YOUR BASIC DUTIES? 9 10 I have worked for the Commission for twenty-eight years, dealing mainly with natural 11 gas utility issues on both a formal and informal basis. My duties include such things 12 as daily contact with the public concerning quality of service, rule interpretations and 13 explanations, and general assessment of informal issues. In a formal case situation, 14 I am responsible for developing, presenting, and supporting Staffs position where l5 appropriate to my background and training. I also participate in most of the 16 depreciation cases that come before the Commission. I am currently a member of the 17 NARUC Staff Subcommittee on Gas. l8 CASE NOS. 08-1783-G-42T & 08-1761-G-pC TESTIMONY OF ERIC F. deGRUYTER PAGE NUMBER 2 1 a. WHAT IS YOUR EDUCATTONAL BACKGROUND? 2 3 In 1975I received a Bachelor of Science degree in mathematics and physics from 4 Davis and Elkins College and a Bachelor of Science degree in Industrial Engineering 5 from West Virginia University. Since my employment with the Commission I have 6 attended various schools, including the Gas Institute of Technology's course in gas 7 distribution engineering, conferences and seminars dealing with a wide range of gas I industry and general regulatory topics. I have also attended several of a series of I courses offered by Depreciation , Inc., in Michigan. t0 11 A. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS CASE? 12 t3 A. I will present Engineering Staffls position on Dominion Hope's (Hope) proposal to 14 add aPipeline Replacement Rider (PR Rider or Rider)) to its Commission approved 15 tariff as part of the general rate case. I will also make recommendations regarding l6 operational issues that should be included in any Commission Order approving the 17 proposed sale of Hope. 18 CASE NOS. 08-1783-G-42T & 08-1761-G-PC TESTIMONY OF ERIC F. dCGRUYTER PAGE NUMBER 3 1 a. \ryHAT IS YOUR UNDERSTANDTNG OF HOPE'S PROPOSAL TO 2 IMPLEMENT THE PR RIDER ? 3 4 A. As described in Hope's filing, the Rider would be designed to collect, from Hope's 5 customers, in the year following the capital expenditure related to pipeline 6 replacement, the full amount of the year's costs associated with the capitalexpended. 7 In effect, the customers would be paying an annually adjusted rate designed to I recover Hope's incremental costs associated with capital expenditures that Hope 9 deems necessary to invest in its pipelines on an "as you go" basis. The costs would t0 be submitted to the Commission in a formal f,rling for its consideration as to 11 reasonableness. By a method prescribed by Hope's proposed tariff provisions, a per 12 unit (Mcf) rate would be calculated and added to each customer's bills for the coming 13 year, with the rate applied to each Mcf of consumption. 14 15 A. \ryHAT IS HOPE'S PURPOSE IN REQUESTING THIS RIDER ? 16 17 A. Hope states that it desires to replace the bare steel pipe remaining in its system at an 18 accelerated pace. (Bare steel is subject to corrosion at a much greater rate than the CASE NOS. 08-1783-G-42T & 08-1761-G-PC TESTIMONY OF ERIC F. deGRUYTER PAGE NUMBER 4 1 steel pipe used in modern times which is coated and wrapped and cathodically 2 protected to retard and even prevent corrosion. Bare steel is no longer allowed to be 3 installed in distribution systems subject to the jurisdiction of the federal Office of 4 Pipeline Safety.) Due to the age and condition of much of the bare steel in Hope's 5 system, Hope has determined that it is appropriate to remove and replace it as quickly 6 as is feasible. Hope sees its PR rider as a means of recovering its cost of capital and, 7 I assume, placing the capital itself into its rate base, as well as recovering associated I costs such as return on investment, O&M, taxes, and depreciation þresumably the 9 beginning of a depreciation cycle for the new plant as well as the cost of removal of 10 the old plant) in a more timely manner, as opposed to within a traditional base rate 11 case which is not typically an annual filing. Hope states that accelerated bare steel 12 replacement would ultimately result in reduced O&M costs related to leak repair and 13 monitoring, as well as reduced line loss and enhanced safety. 14 15 a. How DOES IMPOSTTION OF THE RrDER \ryORK ? t6 17 A. On August 31 of each year, Hope would file with the Commission its compilation of l8 incremental costs associated with capital expended for pipeline replacement during CASE NOS. 08-1783-G-42T & 08-1761-G-PC TESTIMONY OF ERIC F. dEGRUYTER PAGE NUMBER 5 1 the previous year ending June 30. The Commission would then investigate those costs 2 and determine the reasonable amount to be included in the Rider calculation and 3 calculate a unit rate, based on volume projections in Hope's concurrent Rule 30-C 4 case for inclusion in rates for the l2months beginning November 1. The Rider 5 would apply to all customers except special contract customers (typically 6 transportation customers with flexed-down rates), and would be collected on a 7 volumetric basis. I 9 A. WHAT IS YOUR POSITION FROM AN ENGINEERING STANDPOINT ON 10 HOPE'S PROPOSAL ? 11 12 A. Hope, through its responses to Staff interrogatories, indicates that it has done no 13 formal analysis of its pipeline system and plans to wait until its cost recovery 14 proposal is approved by the Commission to perform the study. This prevents Staff 15 from evaluating the plan and forming an opinion as to its reasonableness. Therefore, l6 Staff believes that the proposal for a cost recovery rider is premature and as such 17 recommends that it be rejected. 18 CASE NOS. 08-1783-G-42T & 08-1761-G-PC TESTIMONY OF ERIC F. deGRUYTER PAGE NUMBER 6 1 A. WHAT ARE YOUR RECOMMENDATIONS REGARDING THE SALE OF 2 HOPE ? 3 4 A. If the Commission deems it to be in the public interest to approve the sale of Hope, 5 I recommend that several operational conditions be placed upon the new owner. As 6 a natural gas public utilþ regulated by the State of West Virginia, the new owner 7 should be required to: 8 l) Ensure that a perpetual, binding contract is in place for gas supplies to mainline I field tap customers, both the approximately 9,000 current customers and future l0 applicants for service. Since the bulk of these çustomers will become dependent on 11 an unrelated third party supplier which is currently affiliated with Hope, it is essential 12 that contracts with Dominion Transmission and any other Dominion entities 13 necessary for gas supply be put into place. 14 2) Commit to ensuringthat Hope's current level of qualify of service, including but 15 not limited to emergency and non-emergency response times and other customer 16 service related matters, not deteriorate. 17 3) Commit to seeking Staff advice prior to closing or relocating any customer service t8 centers in the State. CASE NOS. 08-1783-G-42T & 08-1761-G-PC TESTIMONY OF ERIC F. deGRUYTER PAGE NUMBER 7 1 4) Commit to the retention of operational management personnel and positions that 2 are currently in place. 3 5) Commit to maintaining current operational workforce levels. 4 6) Commit to maintaining the current pace of Hope's bare steel replacement program 5 and continuing to maintain satisfactory unaccounted for gas levels, leak repair 6 practices and other maintenance activities. 7 a. DoEs THIS CONCLUDE YOUR DTRECT TESTIMONY ? I 9 A. Yes, it does. t0 11 CASE NO. 08-1783-G-427 HOPE GAS, fl.IC., dba DOMINION HOPE CASE NO. O8-I761-G-PC DOMINIONT RESOURCES, [NIC., HOPE GAS, INTC., dba DOMINION HOPE, and PEOPLES HOPE GAS COMPANIES, LLC. **PUBLIC VERSION ?K* DIRECT TESTIMONY OF BYROI{ L. HARRIS Acquisition On behalf of the Consumer Advo cate Division Of the Public Service Commission Of \Mest Virginia Dated: Ãpril24.2008 1 Q. PLEASE STATE YOURNAME AND BUSINESS ADDRESS. Z A. My name is Byron L. Harris. My business address is 723 Kanawha Boulevard, East, 700 3 Union Building, Charleston, West Virginia 25301. 4 5 Q. PLEASE STATE YOUR EMPLOYER AND POSITION. 6 A. I am the Director of the Consumer Advocate Division of the Public Service Commission 7 of West Virginia. 8 g A. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND. 10 A. In 1976,I obtained a Bachelor of Arts Degree from Indiana University, where I majored 11 in history and economics. I received my Master of Arts in Economics from Indiana 12 University in 1980. My Master's Thesis was entitled, "A Forecast of the Residential 13 Demand for Electricity in the Public Service Indiana Region." l4 15" A. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION? 16^ A. Yes. I have testified on numerous occasions in natural gas and electric cases. t7 18 A. HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY OTHER ADMINISTRATIVE 19 OR LEGISLATIVE BODIES? 20 A. Yes, I have testified before the Public Service Commissions of Indiana, Wisconsin and 21 Minnesota. I have also testified before the Miruresota Energy Agency and the Minnesota 22 Pollution Control Agency. I have also presented testimony before the Commerce 23 Committee of the United States House of Representatives. 24 PUBLIC VERSION - Page I - I a. DO YOU SERVE ON ANY COMMITTEES ON BEHALF OF THE CONSUMER 2 ADVOCATE DIVISION? J A. Yes. I am on the Executive Committee of the National Association of State Utility 4 Consumer Advocates (NASUCA). I was formerly the chair of the NASUCA Gas 5 Committee. I am also a member of the Staff Subcommittee on Accounting and Finance of 6 the National Association of Regulatory Utility Commissioners. 7 I a. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 9 A. I will present the position of the Consumer Advocate Division (CAD) regarding the l0 petition by Dominion Resources, Inc. (DRI) and Peoples Hope Gas Companies, LLC (PH 1l Gas) for consent to allow PH Gas to purchase the common stock of Hope Gas, Inc. t2 (Hope). Although PH Gas is the entity that filed the petition, PH Gas is simply a shell 13 company that was formed for the pu{poses of this acquisition. The ultimate purchaser of t4 Hope is Babcock & Brown Infrastructure Fund North America LP (BBIFNA). I will 15 refer to the purchasing entity as BBIFNA in my testimony. I also note that the acquisition t6 of Hope is part of a larger transaction in which BBIFNA is also acquiring the stock of t7 Hope's utility affiliate in Pennsylvania, Dominion Peoples Gas Company (Peoples). 18 Direct and rebuttal testimonies have already been filed in the Pennsylvania proceeding. 19 Since many of the issues associated with the Hope acquisition have already arisen in the 20 Peoples proceeding, I will be referring to several documents from that proceeding. 2t 22 a. WHAT IS THE CONSUMER ADVOCATE'S POSITION REGARING TIIE JOINT 23 APPLICATION TO SELL THE STOCK OF HOPE GAS,INC. TO BBIFNA? 24 A. The Consumer Advocate Division (CAD) does not support the request by DRI and PUBLIC VERSION -Page 2 - 1 BBIFNA to sell the stock of Hope, unless the Commission places a number of conditions ) on the sale. As I will discuss further below, there are many aspects of the proposed J acquisition that will harm Hope's ratepayers. Given the evidence of harm that will result 4 from this transaction, I do not believe that the Applicants can meet the statutory burden 5 set forth in \|lest Virginia Code $24-2-12. Without the conditions proposed by the CAD, 6 the proposed transaction is not in the public interest' 7 As I will explain in greater detail below, DRI's ownership of Hope has not been 8 beneficial to Hope's ratepayers. While the prospect of continued ownership of Hope by 9 DRI is less than desirable, at least continuation of the status quo will not cause many of 10 the harms that will occur under the proposed transaction. 11 T2 a. PLEASE SUMMARTZE THE HARM THAT THE PROPOSED SALE WILL HAVE 13 ON HOPE'S RATEPAYERS. l4 A. Each of the issues below is discussed in greater detail either in my testimony or in the 15. testimony of the CAD's witness Mr. Smith: T6 l. The revenue requirement under BBIFNA ownership is higher than under continued T7 DRI ownership. The CAD has calculated that Hope's rates would need to increase by 18 $3.8 million under BBIFNA ownership and $3.3 million under continued DRI ownership. t9 2. The decision by DRI and BBIFNA to utilize Section 338(hX10) of the Internal 20 Revenue Code will result in the loss (for ratemaking purposes) of Hope's Accumulated 2l Deferred Income Taxes (ADIT) and Accumulated Investment Tax Credits (ADITC). The 22 loss of these items, which are used to reduce Hope's rate base, will result in higher rates 23 for Hope's ratepayers for years beyond the current rate case' 24 3. BBIFNA is seeking to recover from Hope's ratepayers approximately BEGIN PUBLIC VERSION - Page 3 - 1 CONFIDENTIAL END CONFIDENTIAL of transaction and transition 2 costs in future rate cases. 3 4. BBIFNA has failed to propose any of the crucial and necessary improvements to 4 Hope's management. 5 5. BBIFNA's proposal to outsource its gas supply function will result in higher purchased 6 gas costs and will hamper the Commission's ability to fully audit the purchasing practices 7 that underlie Hope's purchased gas costs. I s a. WHAT CONDTTTONS AND THE COMMTSSION PLACE ON APPROVAL OF THE IO TRANSACTION THAT WOULD MAKE T}IE TRANSACTION IN THE PUBLIC 11 INTEREST? 12 A. The CAD believes that the following conditions must be included in order to remedy the 13 harms identified above. Without these conditions, the transaction would not be in the 14 public interest. 15 1. Hope's rate of retum on rate base in future base rate proceedings must be computed 16 based on a capital structure that excludes acquisition premiums or any type of "goodwill" 17 that exceeds net plant value, and neither Hope nor its owTrers should be permitted to 18 recover from ratepayers, directly or indirectly, an acquisition premium. 19 2. The transaction costs associated with the acquisition must be permanently excluded 20 from rates. 21 3. The transition costs associated with the acquisition must be permanently excluded 22 from rates. I I The exclusion for items I through 3 would include any attempt to recover these costs indirectly by virtue of a modification to a consolidate tax savings calculation. PUBLIC VERSION -Page 4 - 1 4. There should be no deferral of any of the transaction and transition costs incurred by 2 BBIFNA, PH Gas or Hope as a regulatory asset for future recovery. Such costs should be 3 borne exclusively by shareholders, 4 5. Financing for any non-regulated capital projects and for projects undertaken for 5 purposes other than providing service to Hope's retail utility customers must be non- 6 recourse'to Hope and its customers. 7 6. The Buyer, BBIFNA, through the newly created holding company PH Gas, will be 8 solely responsible for any financing cost increases that occur within five years after the 9 acquisition is consummated. This would occur as part of the rate case moratorium 10 described below. 11 7. BBIFNA must commit to provide an adequate "Hold Harmless Ratemaking t2 Adjustment" in future rate cases to protect ratepayers from the removal of Accumulated 13 Defened Income Tax and Accumulated Deferred Investment Tax Credit balances from l4 Hope's books resulting from the transaction. 15 8. To provide a rate stability benefit to Hope ratepayers and help assure that the transition 16. and transaction costs of the ownership change are not pushed down or charged to T7 ratepayers, the base rates of Dominion Hope as determined in the current Hope rate case 18 should be capped for a period of five years after the acquisition is consummated. t9 9. BBIFNA should not be permited to outsource its gas supply function. 20 10. BBIFNA must commit to the establishment of a bona fide headquarters for Hope in 2 A nonr"rourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge ofcollateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the ðollateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply paid out the difference. Thus, non-recourse debt is typically limited to 80% or 90%o loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower. PUBLIC VERSION -Page 5 - 1 Clarksburg, which will be staffed, at minimum, with the following management level 2 positions: 3 a. President or Senior Manager, responsible for the management of Hope and 4 reporting directly to the President of PH Gas. This person must also be a member 5 of the Board of Directors. This person cannot be the same person as the President 6 or Senior Manager of Peoples. 7 b. Gas Procurement Manager, responsible for purchasing both interstate and local 8 gas supplies, including gas price hedging activities. 9 c. Transportation and Storage Control Manager, responsible for nomination of gas 10 supply and balancing of gas supply on interstate and intrastate pipelines. 11 d. Customer Service Manager, responsible for managing all customer service 12 activities, including responding to requests for service, terminations, complaints, 13 etc. 14 e. Field Operations Manager, responsible for management of the operation and 15 maintenance of all plant and equipment. t6 f. Rates and Regulatory Affairs Manager, responsible for the preparation of all t7 rate filings and oversight for all other filings before the Commission. 18 19 A. PLEASE DESCRIBE HOW THE REMAINDER OF YOUR TESTIMONY IS 20 ORGANIZED . 2l A. In the first section of my testimony, I will discuss the history of Dominion's ownership 22 of Hope. In the second section, I will discuss several of the benefits that BBIFNA claims 23 will accrue to Hope's customers under the transaction. The third area I will discuss is the 24 crucial need for an increased management presence at Hope. In the fourth section of my PUBLIC VERSION - Page 6 - I testimony, I will explain why BBIFNA's proposal to outsource responsibility for the 2 procurement of gas supplies on behalf of Hope will be detrimental to Hope's customers. J In the fifth section, I will explain why the costs associated with BBIFNA's Transition 4 Services Agreement with DRI should not be recovered from Hope's ratepayers. 5 6 1. Historv of Dominion Ownership of Hope 7 A. PLEASE DESCRIBE THE UTILITY OPERATIONS OF HOPE. I A. Hope serves approximately 115,000 customers in 32 counties. Although Hope serves 9 customers located as far north as Marshall County and as far south as McDowell County, t0 the majority of Hope's customers are located in and around Harrison, Marion, 11 Monongalia and Wood counties. Hope's total throughput is approximately 25 Bcf per t2 year. About one-half of this throughput is sales volumes and the other half is T3 transportation volumes. T4 15 a. DO YOU BELIEVE THAT DOMINION'S OWNERSHIP OF HOPE GAS HAS BEEN t6 BENEFICIAL FOR HOPE'S RATEPAYERS? T7 A. No. Dominion has failed to live up to the commitments that it made to this Commission 18 at the time that the Hope assets were acquired. Dominion has also failed to honor t9 agreements that were made by its predecessor, Consolidated Natural Gas, with this 20 Commission. Dominion has systematically stripped Hope of most of its V/est Virginia- 2l based employees in the operational, managerial and customer service activities of the 22 utility. These functions are now performed by employees of other affiliates located 23 primarily in Richmond, but also in Pittsburgh (Peoples Gas) and Cleveland @ast Ohio). 24 Dominion has demonstrated on several occasions that it did not operate the utility assets PUBLIC VERSION -Page7 - I for the benefit of the utility and its customers, but instead decided to make the utility?s 2 interests subservient to the interests of other Dominion aff,rliates. J 4 o. WHAT COMMITMENTS DID DOMINION MAKE AT THE TIME THAT HOPE 5 WAS ACQUIRED THAT IT HAS FAILED TO HONOR? 6 A. On July 27,1999, the Commission issued an order approving the acquisition of Hope by 7 Dominion in Case No. 99-0462-G-PC. In that proceeding, Dominion made a commitment I to keep Hope's and CNG Transmission's headquarters in Clarksburg. The Commission 9 was also told that Hope would have minimal workforce reductions as a result of the 10 merger. Dominion's actions have not lived up to these commitments to the Commission. l1 Hope may still list Clarksburg as its 'headquarters', but the vast majority of the 72 managerial control and decision-making is done in Richmond and Pittsburgh. Clarksburg 73 is Hope's 'headquarters' in name only. Also, Hope has experienced dramatic declines in 14 employees. 15 The commitment to maintain Hope's headquarters in Clarksburg has a long 16 history. In 1983, Hope signed an agreement with the Commission Staff to settle the l7 reorganization proceeding of Consolidated Gas Supply Corporation before the Federal 18 Energy Regulatory Commission, which included the following in paragraph VII: t9 Clarksburg will continue to be the headquarters of Hope and the site of 20 Transmission's headquarters for its West Virginia operations following 21 reorganization. Further, no significant office or manpower changes are 22 planned as a result of the reorganization. 23 24 I have attached a copy of the agreement as Exhibit BLH-I. When Dominion sought to 25 acquire Hope in 1999, Mr. Robert Rigsby, testifying on behalf of Dominion, reiterated 26 the commitment to keep Hope's headquarters in Clarksburg. Exhibit BLH-2 is comprised PUBLIC VERSION - Page 8 - 1 of the cover and two pages of the transcript in Case No. 99-0462-G-PC containing Mr. 2 Rigsby's responses to questions posed by Chairman Lane. Ja I have been involved in Hope proceedings for many years and have made many 4 visits to Hope's offices to conduct on-site investigations. When Hope had a bona fide 5 headquarters in Clarksburg, Hope had managerial personnel with titles of President, Vice 6 President, General Counsel, etc. Hope also had personnel responsible for gas purchasing, 7 engineering, rates and regulatory affairs. Hope also had its own call center operation. 8 Hope's current 'headquarters' has no managerial personnel, no gas purchasing function, 9 and no call center. The remaining employees do not appear to have any significant 10 authority over operational decisions of the utility. I am not implying that these remaining 11 employees are not hard working or not competent at their jobs. They are. However, I do t2 not believe that they are empowered in such a way as to have any significant control over 13 Hope's operations. 14 Not only have the number of employees at Hope's 'headquarters' declined; there 15' has been a decline in Hope's total employee level. In January 2001, Hope had 327 16 employees. As of the end of 2008, Hope only had 195 employees. Unfortunately, these t7 employment declines have not lead to commensurate cost reductions for Hope. The 18 employees performing many of the frinctions formerly performed by Hope employees are 19 now employees of Dominion Resources Service Company (DRS).. Hope still incurs very 20 high levels of administrative and general expenses, the vast majority of which are 2T allocated costs from the service company. )) a WHAT ARE THE AGREEMENTS MADE BY DOMINION'S PREDECESSOR THAT 23 DOMINION HAS FAILED TO HONOR? 24 A. There have been two instances in which Dominion has failed to honor commitments PUBLIC VERSION - Page 9 - I made by its predecessor. The first instance where Dominion failed to honor its 2 commitments was the subject of a Confidential Order of the Commission in Case No. 03- a J 1 169-G-30C. In order to avoid filing two different confidential versions of my testimony 4 in this proceeding, I respectfully request the Commission to take notice of its December 5 16,2005 order in that proceeding for a discussion of this issue. Second, Dominion failed 6 to honor an agreement between CNG Transmission and the Commission made in the 7 1980 Consolidated Gas Supply reorganization proceeding. In that proceeding, CNG I Transmission agreed to provide transportation service for all of Hope's utility 9 requirements. ln both instances, Hope failed to take any action against its Dominion 10 affiliate to require continuation of these commitrnents. Hope failed to act in the interests 11 of its customers. Instead, Hope chose to acquiesce to the decisions made by its Dominion t2 affiliates even though those decisions harmed Hope's customers. l3 T4 a. PLEASE DESCRIBE THE TRANSPORTATION ISSUE. 15 A. ln the spring of 2004, DTI began rejecting requests made by Hope for taps on its t6 gathering lines to serve potential customers. Hope has approximately 5,400 retail t7 customers that are served via gathering lines of DTL3 Neither DTI nor Hope made any 18 filings with the Commission: a) to notify the Commission that tap requests would no t9 longer be processed; or b) to request Commission approval of a modification to the 20 procedures established by the Commission for tap requests in Case No. 95-0154-G-PC. 2t Predictably, and in rather short order, DTI's refusal to process tap requests for Hope 22 customers lead to a number of formal complaints before this Commission. 23 This issue was eventually resolved in Case No. 04-1951-G-PC. Unfortunately, 'Hope has approximately 1,000 additional customers served from transmission and storage lines. PUBLIC VERSION - Page 10 - i Hope's failure to act promptly in response to DTI's decision forced some customers to 2 wait as long as a,year before obtaining gas service. 3 4 2. Benefits Claimed bv BBIFNA 5 Q. WHAT BENEFITS DOES BBIFNA CLAIM WILL ACCRUE AS A RESULT OF THE 6 ACQUISITION? 7 A. The direct testimonies by Messrs. Kinney and Cyrus list the following benefits of the 8 acquisition: g 1. BBIFNA is a frnancially strong parent company that will re-focus Hope's efforts on l0 distribution infrastructure investment. (Kinney, p. 15 lines 18-19) l1 2. Ending uncertainty about Hope's status will improve employee morale. (Kinney, p. 15 12 line23 -p. 16line 4) 13 3. Hope's central office will remain in Clarksburg. (Kinney, p. 16 lines 4-5) 14 4. Functions now performed by Dominion Resource Service Company in out-oÊstate 15 locations will be "returned to the PH Gas service territory".(Kinney, p. 16 lines 5-8) 16 5. Pension assets (included a portion of the over-funded union pension fund) for the l7 liability associated with employees of the new company will be transferred. (Kinney, p' I 8 16 line - p. 19 line 10) lg 6. BBIFNA will continue Hope's programs of community involvement. (Kinney, p. 19 20 lines 11-16) 21 7. Outdated and inefficient systems and infrastructure will be improved. (Cyrus, p. 11 22 lines 3-9) 23 8. The gas procurement contract with PPlEnergyPlus (PPL-E) will provide Hope with PUBLIC VERSION - Page 11 - 1 the benefit of its enhanced market intelligenceo. lcyrus, p. 12 line 11 - p. 13 tine 21) 2 9. The customer services contract with PPL Solutions (PPL-S) will improve customer J service. (Cyrus, p.14 line I - p. 15 line 4) 4 5 a. DO YOU AGREE V/ITH BBIFNA'S CHARACTEzuZATION OF THE BENEFITS OF 6 THE ACQUISITION? 7 A. For the most part, no. The purported benefits are not nearly suffrcient to outweigh the I harm that will result from the acquisition. Most of the benefits claimed by BBIFNA are 9 very vague. For example; re-focusing on distribution infrastructure (#1) and improving 10 outdated infrastructure (#7) appeff to refer to Hope's proposal in the general rate case to 11 implement a Pipeline Replacement Rider tariff. As I explain in my testimony in that case, 12 I do not believe the new tariff is needed nor is it beneficial to Hope's ratepayers. 13 In addition, fwo of BBIFNA's claimed benefits; a central office in Clarksburg t4 (#3) and returning functions to the PH Gas service territory (#a) do not appear to be 15 significant benefits upon closer examination. Finally, I believe that BBIFNA's proposed T6 asset management contract with PPL-E will, in fact, be detrimental to Hope's customers. T7 I will discuss each of these items in greater detail below. 18 t9 a. PLEASE EXPLAIN WHY BBIFNA'S PLEDGE TO KEEP HOPE'S CENTRAL 20 OFFICE IN CLARKSBURG IS NOT SIGNIFICANT? 2t A. Hope already has a 'central offrce' in Clarksburg. However, as I have previously 22 discussed, the employees in this central offrce do not have substantive control over 23 Hope's practices and policies. It does not appear that BBIFNA has any intention of 4 Thrr" types ofcontracts are generalty referred to as asset management contracts. PUBLIC VERSION -Page 12 - 1 restoring any of the key managerial functions to the Clarksburg offtce that would allow 2 the office to function as a true headquarters. J The only potential addition to the central office cited by BBIFNA is the possible 4 employment of the Dominion Resource Services (DRS) employees who directly support 5 the business of Hope. Unfortunately, this pledge will have a minimal impact upon Hope. 6 According to BBIFNA's response to a Data Request OCA-7-3 in the Dominion Peoples' 7 Gas proceeding, DRS only has BEGIN CONFIDENTIAL I 9 END CONFIDENTIAL. BBIFNA also cited the potential hiring t0 of DRS employees as a benefit in the Peoples case. Clearly, this purported benefit would 11 be of much greater rnagnitude for Peoples than for Hope. 12 13 a. WHY ISN'T BBIFNA'S PLEDGE TO RETURN FUNCTIONS TO THE PH GAS t4 SERVICE TERRITORY A SIGNIFICANT BENEFIT TO HOPE? 15 A. BBIFNA made the same pledge in the Peoples acquisition proceeding in Pennsylvania. 16 Once again, the benefit from this pledge will flow almost exclusively to Peoples and will l7 have a minimal impact on Hope. (CONFIDENTIAL) Exhibit BLH-3 is a copy of 18 BBIFNA's response to the CAD's Data Request BB-15. BEGIN CONFIDENTIAL 19 20 END 21 CONFIDENTIAL 22 In addition, a portion of this pledge is associated with BBIFNA's decision to 23 replace the functions performed by DRS with the gas procurement and customer service 24 contracts with PPL-E and PPL-S, respectively. Once agaín, this purported benefit may be PUBLIC VERSION - Page 13 - 1 significant for Peoples, but will have little or no impact on Hope. PPL-E and PPL-S are 2 subsidiaries of PPL Corporation, located in Allentown Pennsylvania. The customer Jô service and gas procurement functions of PPL-E and PPL-S are conducted out of PPL 4 Corp's Pennsylvania offices. Therefore, I do not expect any benefit to Hope from the o'PH 5 transfer of these functions to the Gas service territory". 6 7 a. HAS BBIFNA PROPOSED ANY CONDITIONS ON ITS PROPOSED ACQUISTION I OF PEOPLES? 9 A. Yes. Exhibit BLH-4, is a copy of an exhibit attached to the rebuttal testimony of 10 BBIFNA's CEO, Mr. Kinney in the Peoples proceeding. Although corollaries to these 11 conditions have not been proposed in this proceeding, I will be referring to several of t2 these conditions in my testimony. 13 T4 3. Need for Increased Management Presence at Hope 15 a. WAS THE NEED FOR AN INCREASED MANAGEMENT PRESENCE AT HOPE AN 16 TSSUE IN THE PzuOR ACQUISITION PROCEEDING INVOLVING EQUITABLE t7 RESOURCES' REQUEST TO PURCHASE HOPE? 18 A. Yes. Both Staff and the CAD addressed the need for an increased management presence 19 at Hope. During the course of BBIFNA's due diligence review, BBIFNA should have 20 become aware of the myriad concerns raised by Staff and the CAD. Unfortunately, 2I BBIFNA has failed to propose any modifications to Hope's management structure to 22 address these concerns. BBIFNA's only proposal regarding Hope's management is to 23 retain the current management. Unfortunately, retaining the status quo is not acceptable. 24 PUBLIC VERSION - Page 14 - 1 Q. PLEASE EXPLAIN WHY IT IS NECESSARY TO HAVE AN INCREASED 2 MANAGEMENT PRESENCE AT HOPE. 3 A. As I have previously discussed, Dominion has failed to honor its commitment to maintain 4 Hope's headquarters in Clarksburg. I believe the lack of management personnel with 5 sufficient authority within the Dominion hierarchy in Clarksburg has contributed to 6 Hope's lack of response to detrimental actions taken by other Dominion affiliates. 7 Another concern is that the acquisition has caused, and may continue to cause, 8 experienced Hope personnel to either retire or accept positions in other Dominion g affiliates. This lack of and potential further loss of experienced personnel also 'West l0 necessitates a significant management presence in Virginia whose sole focus is the 11 management of the Hope utility assets. t2 13 A. PLEASE DESCRIBE THE MANAGEMENT POSITIONS YOU BELIEVE ARE 1,4 NECESSARY FOR HOPE. 15 A. The list of management positions below is substantially the same list that the CAD 16 recommended in the prior acquisition proceeding: 17 a. President or Senior Manager, responsible for the management of Hope and 18 reporting directly to senior management of the parent company. This person ß cannot be the same person as the President or Senior Manager of Peoples. Z0 b. Gas Procurement Manager, responsible for purchasing both interstate and local 2l gas supplies, including gas price hedging activities' 22 c. Transportation and Storage Control Manager, responsible for nomination of gas 23 supply and balancing of gas supply on interstate and intrastate pipelines. 24 d. Customer Service Manager, responsible for managing all customer service PUBLIC VERSION - Page 15 - activities, including responding to requests for service, terminations, complaints, etc. 3 e. Field Operations Manager, responsible for management of the operation and 4 maintenance of all plant and equipment. 5 f. Rates and Regulatory Affairs Manager, responsible for the preparation of all 6 rate filings and oversight for all other filings before the Commission. 7 The six positions that I have listed are the minimum management positions that I 8 recommend based upon my experience with Hope. Since I am not intimately familiar 9 with all aspects of Hope's operations, such as pipeline safety, other parties may suggest 10 other management positions. The Commission should not consider the six positions that I 11 have recommended to be an exhaustive list. 12 I do want to highlight for the Commission the importance of three of the positions 13 that I have recommended. I will discuss in further detail the critical importance of the 14 need for a President of Hope and for the Gas Supply Manager and Transportation and 15 Storage Control Manager. t6 17 a. WHy DO yOU BELIEVE IT IS IMPORTANT FOR HOPE TO HAVE A 18 PRESIDENT? 19 A. Simply put, I believe a gas utility requires a person with authority over all of the utility's 20 employees and whose goal is to operate the utility for the benefit of its ratepayers and its 2l shareholders. The person frlling this position also has to have sufficient stature within the 22 larger corporate structure to be able to fight for the resources and policies required to 23 carry out this goal. I am firmly convinced that many of the problems that have plagued 24 Hope under Dominion's ownership either would not have occurred or wouid have been PUBLIC VERSION-Page 16 - 1 handled differently had there been a President of Hope' 2 J a. WHO IS THE CURRENT PRESIDENT OF HOPE? 4 A. Mr. Klink, who is a witness in this proceeding on behalf of DRI, is the current President. Dominion East 5 Mr. Klink is also the president of DRI's other gas distribution utilities; management 6 Ohio and Dominion Peoples. I should also note that much of the day-to-day that Mr. 7 of Hope is the responsibility of Mr. McKeown. It is my understanding 8 McKeown is also responsible for the daily management of Dominion Peoples' 9 THE INTERESTS OF HOPE'S 10 a. WHY DO YOU BELIEVE THAT IT IS HARMFUL TO WHO IS ALSO 11 CUSTOMERS TO HAVE A PRESIDENT OR SENIOR MANAGER t2 RESPONSIBLE FOR OTHER GAS UTILITIES? mean no T3 A. The fundamental problem is that no person can serve multiple masters. I t4 disrespect to either Mr. Klink or Mr. McKeown, but their responsibilities are clearly not any 15. limited to ensuring the safe, reliable and cost effective operation of Hope' Within 16 large organization,there will always be decisions as to where to devote the organization's t7 resources such as capital and human resources. The current management structure how 18 automatically creates conflict for both Mr. Klink and Mr. McKeown in determining t9 resogrces should be allocated among the multiple Dominion distribution utilities. 20 HOPE TO HAVE A GAS 21 A. WHY DO YOU BELIEVE IT IS IMPORTANT FOR 22 SUPFLY MANAGER AND A TRANSPORTATION AND STORAGE CONTROL 23 MANAGER? 24 A. I believe these two management positions are necessary to oversee the critical function of PUBLIC VERSION -Page 17 - 1 purchasing gas on behalf of Hope's customers. Purchased gas costs comprise 2 approximately 75% of the total bill of a residential customer. The focus of the gas supply J management function within a utility must be solely upon achieving the utility's goals of 4 reasonably low and reasonably stable gas prices for its customers. This function is simply 5 too critical to the role of a gas utility to be outsourced to another entity. Even if these 6 functions were to be performed by PG Gas on behalf of Peoples and Hope, there will 7 always be potential conflicts of interest between the two utilities. I 9 a. CAN YOU CITE AN EXAMPLE OF A WEST VIRGINIA GAS UTILITY THAT 10 OPERATED SUCCESSFULLY WITH AN INDEPENDENT PRESIDENT AND GAS 1l SUPPLY FUNCTION? t2 A. Yes. Mountaineer Gas Company operated very successfrrlly for many years with an 13 independent management structure. Even though Mountaineer was owned by entities 14 with other interests (e.g. Allegheny and Western and Energy Corporation of America 15 were gas producers), the Presidents of Mountaineer were able to stay away from the t6 affiliate issues that have plagued Hope. Also, until recently, Mountaineer's in-house t7 purchase of gas supplies routinely achieved lower purchased gas costs than Hope. 18 T9 a. ARE THERE ANY OTHER REASONS WHY IT IS CRUIAL FOR HOPE TO HAVE 20 AN INCREASED MANAGEMENT PRESENCE? 2l A. Yes. One negative aspect any acquisition of Hope is the inevitable loss of the few 22 remaining key Hope employees. Hope has a number of employees who have many years 23 of experience in the operation of the utility. Because of the change in ownership and its 24 potential impact on retirement benefits, many of these employees may chose to transfer to PUBLIC VERSION - Page 18 - 1 a position at another Dominion company or to retire. Some employees have already 2 made these decisions. For example, the person responsible for balancing Hope's 3 transportation and storage receipts and deliveries has taken position with another 4 Dominion company. Since Hope's system is fragmented into numerous distribution 5 bubbles, it is unlikely that BBIFNA will be able to replicate this person's knowledge of 6 how the system operates for some time. The transition in ownership of Hope also has the 7 potential to create a variety of problems with the consolidation of billing, customer 8 service, accounting, etc. Certain glitches are to be expected. Whether or not these glitches 9 will develop into more serious problems depends upon BBIFNA's response to the 10 problems. I do not believe that BBIFNA will be able to adequately respond to these 11 challenges without sufficient management personnel in place whose sole responsibility is 12 Hope. 13 l4 4. Outsourcing Gas Supply Function 15 A. PLEASE EXPLAIN WHY THE PROPOSED ASSET MANAGEMENT CONTRACT 16 V/ITH PPLENERGYPLUS WILL BE DETRIMENTAL TO HOPE? t7 A. There are several reasons why I believe this proposed contract will be detrimental to 18 Hope. First, as I have previously explained, I believe it is crucial that the gas supply and t9 transportation and storage management functions be retumed to Hope's Clarksburg 20 headquarters. The proposed contract with PPL-E will outsource these important 2t functions. Second, and perhaps most importantly, I do not believe that the outsourcing of 22 the gas procurement function through an asset management agreement can ever be shown 23 to provide benefits to utility ratepayers. Third, the Letter of Intent (LOÐ between 24 BBIFNA and PPL-E contains a provision BEGIN CONFIDENTIAL PUBLIC VERSION - Page 19 - 1 END CONFIDENTIAL that will directly harm 2 Hope's ratepayers. Fourth, the PPL-E contract may hinder the Commission's ability to 3 adequately scrutinize gas purchases made on behalf of Hope in future Rule 30C 4 proceedings, Finally, BBIFNA has yet to sign an actual contract with PPL-E. All that has 5 been negotiated to date is the LOI, which outlines the parameters of a potential contract. 6 Until an actual contract is signed, it is impossible to fully evaluate the impact of the 7 proposed arrangement. 8 9 a. WHY DO YOU BELIEVE THAT ASSET MANAGEMENT CONTRACTS DO NOT 10 BENEFIT UTILITY RATEPAYERS? 11 A. Under the Commission's Rule 30C, natural gas utilities are permitted to recover, on a t2 dollar for dollar basis, all of their prudently incurred purchased gas costs. Outsourcing the 13 gas procuement function to another entity turns what is currently a frmction of the utility t4 on which it does not receive a profit into a profit-making enterprise. The need for the t5 asset manager to make a profit on the transactions it engages in on behalf of the utility t6 simply adds costs to the utility's cost of purchased gas. In addition, assuming that the t7 asset manager will seek - as it should- to maximize its profits, the asset manager will 18 make decisions thæ result in the maximum level of profits for the asset manager. No asset 19 manager can reasonably be expected to forego any transaction that is detrimental to the 20 interests of the utility if that transaction will increase the asset manager's profits. 21 In addition, asset management contracts generally require the utility to adhere to a 22 gas purchasing plan that pre-determines the pattern of gas purchases, storage injections 23 and withdrawals, etc. The two asset management arrangements currently in effect for 24 Bluefreld Gas Company and Mountaineer Gas Company utilize pre-determined gas PUBLIC VERSION -Pase 20 - 1 purchasing plans. It appears from the proposed conditions in the Peoples proceeding 2 shown on Exhibit BLH- 4 thaf BBIFNA anticipates using such a pre-determined plan. J The problem with such plans is that the natural gas market is exceedingly volatile, and 4 utilities need to be able to react to changes in the market. Asset management contracts 5 severely limit the ability of utilities to react to market changes. 6 7 A PLEASE DESCRIBE THE PROVISION IN THE LETTER OF INTENT WITH PPL-E 8 THAT WILL DIRECTLY HARM HOPE'S RATEPAYERS. 9 A. The LOI between BBIFNA and PPL-E is attached as (CONFIDENTIAL) 10 Exhibit BLH-5. As can be seen from the last page of that Exhibit, PPL-E will be 11 permined to BEGIN CONFIDENTIAL t2 13 t4 15. r6 t7 18 19 20 21 END CONFIDENTIAL. 22 During the test year in Hope's current rate case (twelve months ended March 31,2008), 23 Hope eamed approximately $1.1 million in revenues using its gas supply assets under the 24 Capacity Release, Gas Release and Agency Programs. All of these revenues are used to PUBLIC VERSION -Pase2l - I lower the cost of gas service to Hope's ratepayers.t BEGIN CONFIDENTIAL 2 a J END CONFIDENTIAL. 4 5 a. WERE CONCERNS ABOUT THE PROPOSED CONTRACT WITH PPL-E ALSO 6 RAISED IN THE PENNSYLVANIA PROCEEDING? 7 A. Yes. 8 9 a. DID MR. KINNEY ADDRESS ANY OF THESE CONCERNS IN HIS PROPOSED 10 CONDITIONS IN THE PENNSYLVANIA PROCEEDING? 11 A. Yes. As shown on Exhibit BLH-4, Mr. Kinney has proposed a number of conditions T2 associated with the contract with PPL-E (See Nos. 36 through 40). 13 14 a. IF BBIFNA \MERE TO PROPOSE SIMILAR CONDITIONS IN THIS PROCEEDING, 15 WOULD THAT ALLAY YOUR CONCERNS REGARDING THE PROPOSED t6 CONTRACT WITH PPL-E? t7 A. No. First and foremost, I believe it is very important for Hope to manage its own gas 18 supply requirements with its own employees. As I have previously discussed I believe it t9 is important for Hope to have an 'in-house' gas pwchasing function. Second, Mr. 20 Kinney's conditions do not address the problems that will result from Hope bearing the 2t economic consequences of Commission ratemaking decisions that are not also borne by 22 PPL-E. Third, Mr. Kinney's conditions nos. 38 and 39 refer to requiring PPL-E to follow 23 a gas purchasing plan that is approved by the Commission. White Pennsylvania may 5 Th" ,.u"nues from the Capacity Release and Gas Release Programs are captured in Hope's PGA revenues. Revenues from the Agency Program are credited to ratepayers in general rate cases. PUBLIC VERSION -Page 22 - are 1 have a procedure for approval of such plans, this Commission does not. Utilities 2 expected to manage their own gas supplies. a J 4 a. PLEASE EXPLAIN HOW THE PPL-E CONTRACT MAY HINDER THE 5 COMMISSION'S ABILITY TO ADEQUATELY REVIEW HOPE'S GAS 6 PURCHASES IN A RULE 3OC PROCEEDING. 7 A. In each Rute 30C proceeding, Hope bears the burden of proving that it has purchased the 8 lowest cost reasonably available gas supplies. Since PPL-E will be managing Hope's gas 9 purchasing activities under the proposed contract, PPL-E will have to ensure that the l0 purchases made on behalf of Hope meet this standard. This arrangement presents at least 11 two problems for the Commission. T2 First, there may be a disconnect between the Commission's ratemaking rulings 13 and the party which is ultimately impacted financially by the Commission's ratemaking I4 decisions. If the Commission determines in some future Rule 30C proceeding that certain 15 gas purchases were not prudent, then it may disallow the recovery of an amount of T6 purchased gas costs. Such a disallowance would have an economic impact upon Hope, l7 but may or may not have any impact upon PPL-E. If the economic impact of the 18 disallowance is not flowed through to PPL-E under the contract, then Hope will be faced 19 with bearing the economic consequences of decisions that it no longer controls. This z0 mismatch in decision-making responsibilities and in economic consequences could create 2l a number of harmful situations. For example, the Commission may deny Hope recovery 22 of certain gas costs due to an action of PPL-E. If the contract with PPL-E does not allow 23 Hope to alter PPL-E's practices, then Hope will continually be at risk for actions that are 24 not under its control. PUBLIC VERSION -Page23 - I Second, the Commission may have difficulty auditing the purchasing practices of 2 PPL-E in future Rule 30C proceedings. Although Mr. Kinney has proposed a condition J in the Pennsylvania proceeding (No. 40 in Exhibit BLH-4) that would allow the 4 Pennsylvania Commission to gain access to information from an outside Procurement 5 Services Provider, BBIFNA has not made the same offer in this proceeding. In addition, I 6 am concerned that even if access to the necessary information was provided, the 7 presentation of that information may be hampered by assertions of confidentiality. In this 8 proceeding, BBIFNA has demonstrated a proclivity for requesting that information be 9 granted confidential treatment. Claims of confidentiality,legitimate or not, necessarily 10 delay intervenors' access to information necessary to adequately review purchased gas 11 costs. It will be difficult to present evidence on purchased gas costs in a timely manner in I2 future Rule 30C proceedings if access to information is hampered by declarations of 13 confidentiality by BBIFNA and PPL-E. T4 15 5. Transition Services Agreement t6 A. PLEASE EXPLAIN WHY THE COSTS INCURRED UNDER THE TRANSITION I7 SERVICES AGREEMENT SHOULD BE EXCLUDED FROM THE RATES OF 18 HOPE? I9 A. Appendix A to the Stock Purchase Agreement is the draft Transition Services Agreement. 20 The term of the agreement is for 6 months except for benefit services which terminate at 2t the end of the calendar year in which the services \¡/ere initially provided.6 The cost of 22 services under the agreement will be the based upon Dominion's hourly labor rate times 6 On April 22,}}}I,BBIFNA filed an amendment to the Transition Services Agreement. Since this fÏling was made just prior to the frling of my direct testimony, I reserve the right to supplement my testimony after I have had an opportunity to review the amendment. PUBLIC VERSION -Pase 24 - I 1.7. The Agreement states that this cost is consistent with the cost currently incuned by 2 Dominion's affrliated companies for services. This agreement is necessary because so J many of Hope's operational, accounting and customer service functions are performed by 4 employees of various Dominion affrliates. For example, BBIFNA would be unable to 5 adequately process Hope's first Rule 30C proceeding without the services of persons who 6 are not employed by Hope. Many of Hope's gas purchasing, transportation management, 7 and gas accounting functions are performed by employees of affiliate companies I þrimarily DRS), and the decisions made by those employees impact Hope's gas costs. 9 For BBIFNA to be able to process a Rule 30C case for Hope, it will need access to data 10 as well as to employees familiar with the information to be able to show that the gas costs 11 incurred during this ACA period were prudently incurred. t2 The costs that BBIFNA will incur for the frrnctions that will be necessary under 13 the Transition Services Agreement are already included in Hope's base rates. If BBIFNA t4 were to recover these costs through Hope's rates, ratepayers would be paying for the 15" same services twice t6 t7 a. WAS A SIMILAR ISSUE CONCERNING A PROPOSED TRANSITION SERVICES 18 AGREEMENT ALSO RAISED IN THE PRIOR HOPE ACQUISTION PROCEEDING? l9 A. Yes. The same issue was raised by Staff and CAD in the proceeding in which Equitable 20 sought to purchase Hope. Once again, BBIFNA should have been arware of this concern, 2t but has failed to address it in this proceeding. 22 23 a. DOES THIS CONCLUDE YOUR TESTIMONY? 24 A. Yes, it does. PUBLIC VERSION -PageZ5 - EXHIBIT BLH-I Alr u_rLtr LurylMls5loH 0F w. 1'rÅ. HOPE NATUBAL GAS COMPAI{Y Corporallon DEC¡  D¡vr5ion ol Consolldated 6¡s Supply O tgs¡ 445 Wesl Main Streel Clarksburg, West Virginia 26301 LEirAt ui Tt_:'l.ií.i RECET'-/8. LEGAL DEPAFI'IhIEI'JT December 28, 1983 R. Rodecker, General Counsel Robert Commission i¡üest Virginia Public Service 950 Kanawha Bl-vd', E' CharlesLon, VilV 25301 Corporation Re: Conso1idated Gas Supply äããigã"i zat iorr Proceed íng ñR¿"Docket No. cPBo-346 Dear Bob: l-etter is to record in one docu- The PurPose of this of the Pub1ic sett]ãnent agreement with the Staff rnent llope's on v¡hich h7e have reached agree- service commíss;;;:'- The-matters ment are as follov¡s: 1. Hope Gas, rnc' r (Eope) will l:::=5'åî:.:?ti"ii3l"nlå- rates Pit:li:: 1985, retfeci in its -any -91s Transmission Corporat'ion by i'" ot"U1'-Co"solidatäd Gas Act (NGPA) ducers uíå.i-I-lõt Gas Policv (rransmissionl urriiiäie!-n5oaultion-oi"înã-i'laiurar priced at s 107 nor company-o*oäã-ãrraTot ihrough June 30' 1987' Eope After January '1' 198;; and from levels. its rates uny gu'-purchased directly will not reflecl in S 101 of the NGPA nor producers by.it or by ry???*I""iän'undãr priced at s 107 company-owneo unã7oi' uiiiri";;ã-;;oduction levels,unlessllopehas-obtained-theapprovaloftheCommrsslontpot"Lãs"s and establishing bv establishing the need rot-to"r, vrer-e tto! readíly cheaper supplies t*hat dependablË, ' -alternativepurchaset Nor lvilI Hope available at d; ii;;'said gas1lu::-made' incurred above "the sub- seek to ínc1"Aä-tnt"'ão=L" o-f S 10? stitutionPrice'',asdefinedbelowasanunderrecoveryinfutureor general rate cases' Nothing purchased gas (?!cl illinss purchase of S 107 gas at herein"oåt. ,shalt pr."iuãÉ- tf t Lf," contained lo the appropriate " substitutíon a price less Lhan or equal 9as which .orice" nor (2) the purchase"ãt-pip"ii""lsupplied í;;iia.i s io7 eas in the mix' ,,substitution price" ior any S 107 I as ín Hope' s TIre rate paid bv Hope pGC shall be equal ro rhe "ãn'moaiiv eirclude all of from ,r.n=ii=Élon""ã;;;; ad j ustãd to for gas purclraåed p'"-tr'ãË;;-;; q from producers and rransmission's direct productron'191-gas ;;;;;;t-òwned- unã¡o' utt: riated R. Rodecker , General Counsel Robert Commission I¡Jest Virginia Publ i" Serrzice December 28, 1983 Page 2 rr. oegSaf ions of H ' A ' B ' v¡i I I talie over the utiÌ ity ' HoPe and conditions: Ltd., subject to the following terms to the Commission's responsibility A. ït will be of H'A'B'r Ltd' secure the "äãp"iution the forgiveness of B. The purchase price-will be balance owed to llope for gas ?erl H-A.B. 's unpuid which the commrsslon vice, f"'=""t;;"p;;ñ" thereof at the Hope to through rates has authorized purchase""ifã"t prlce will be time of closíng; the its next general included in llope's rate ¡á=t i; rate fi1íng tyel-ye months af ter acquisition C. Hope wil-l reguire ímprovements and up to to make neeeásary short-term all expendi- ten years for Iong-term i*pi""tioents; tures musl receive appropr-iate cost-of-service tre atmenl ' waive D. To the e>:tent it can' the.Commi=-=-i::-*t=t until the DepartmeJ-;i Ttu'''pottation requirements lons-t.t*'iãit;;;"t= have been completed ' obl-i- be responsible for any debts or E. Hope v¡ill not and lloPe wi 11 not gations owed to others bY H'A'B' , ñit" anY rl. A' B' emPloYees ' constitute a acquisition of H.A-8. will not F. HoPe's smalf comPany takeovers bY Précedent for future HoPe - ald-,Gas Purchase 1 TT. Production Properties, Hope 190 gross we1ls Transmission r"'i11 Ieave v"ith addition to Se g.r-iit.nåã" conlracts' (I57.4 ner weffsl-ãrra with appro>rimately'n 224 neld the wells, prod-u"tio" proþertîes drillinglocationswillremaínwithllope.Aceordingtopresentdeveloped reserves are aPProlittåt"iy 18'5 Bcf of estimates, there - rè=.r,,"s associated with the se and 30 to ¿O ncl oi o.,ääreloped of the production properries. a-*oiã pä"t¡."urãi"oãlãiipti""to remain with Hope as con- properties and ;;;-p;rchase cãntracts filed A to the slip'f P'greement tained in lrppenáix t.lo'"tiol-& cP80-346' tiolember 22, 1ö8il l'' FERc oãctäi Robert R. Rodeckel , Generaf Counsel !üest Virginia Publ íc Service Commission December 28, 1983 Page 3 Transnlsston ar¡d 'ihþ,/ /.(, rv. Rate Base of Production Æroperties a¡d transulssion (Ê,.€ Theinitialratebaseassociatedwithpro¿uction/proy_ lrop- *iri be theír actual depreciated orig- fæ: erties to,"*u1o-"it¡ exceed $ 9 - 5 M' val at the tíme of ruoif u.ni zation- not to inal- ue to plant subseguent to the rt is understood that any aadiÉíons in the effective date of reorganízation sh'atl not be included $9.5 M linítation. V. same as that The capital structure of Ëlope v¡ill be the of Supply cotpoiãli"n at the time of reorganization' \-rf . Pricing of HoPe's Ilroduction cost-of- AlL gas produced by llope will be priced on a service basis bY the PSC' V]I. Corporate Ileadguarters ClarlcsburgwillcontinuetobetheheadquartersofHopefor its west virginia and the site headquarters ";"õ;;;=*iii:-oo'= ] Further , no signif icant operations tofiori" g- ;="tg"nizatíon a result of the reor- offiee or Inanpor,¡er changes utã planned as g anization. VIII. WhoJesale Customers Fol.lowingreorganization,Hopewillprovidenaturalgas"pi.É""t ¡tope Dirzisíon' service to *" wño1esale customers of the IX. Cost of Serviee reorg anízation, the llope Gas, Inc. , cost /it the time of wíth the of service wilI, to the po=sible, l¡e consístent "r,t.nË-to by Hope in the most recent rate cost of servi"ã'=ii_polated adjustrnents (Case No. gi-tSB-G-42T). fn.rã aïe to be no case of sglYi!".1g¡roved in Hope's rnost frorn the .r"*uni, ãr cost th= base recent rate case (Case No' gZ-f58-G-421) in determining ratesofÏiopeGas,Ïnc.,asoftlredateofreorganization-Tlrisof the goíng Ievel pro-' provision r".oõni""= that determination producing transmissíon associated with the gas duction and "otl=-tt"r,=ferred directly to Hope hereto- and transrnission fioperties of excrapolation' fore allocated to Hope, will ieguire some amount and, possibIY, estimation' Robert R. Rodecker, General- Counsef Viest Virginia Public Service Commission December 28, 1983 Page 4 >i. Rate Reduction Guarantee be an immediate benefit Hope guarantees that there ivill' to its ratepaveisratepavers ofot at leasË"ti.re'rb P::"1:i Lu"i=*:ru Ì?"if reorg?li?:tion bv Hope on i""åríã"uIãã";:-;;;;-wi'l. - ':3:;:"i::;Ï", would be charsecl ;-h"t3: :'i:i: this benef it wil1 renãioremaa rn were not to taice place, -"9 the ef f ective dale periãd of t*erve^'iånti't, forlot'iing ef f ect for a ;;;;"s5ir¿te f il ing of new of reorguni"utiåil- rr.,i= wirl of-tLre reorganizatíon tarif f s for Eope, ef f ective ;"^'il;-ãut" lf'at the 'B+ benef' it is benef it. ft ïs-un¿"tttooa reflecring thiä it- L]" immediate benef ít assocí- the minirnum to be achieved -rrã- that higher benefít ated with reorganization t"täËu=-t+.;"t |:f' It ís further flowed through to.Hope's ratepayers' refer to v¡il1 be -;;;-ÉÀnef it íãtãtrãã-io'r'"t"it' does no-' undersrood rhat to supply Corporation's or include ,áã,rrtio"rr-rãiãt"a ne iäfiected in Elope's purchased"ri-r;;; gas costs ïniãi, would reduced basis absent reorganization' rates on an "ii;;t¿;ã KI. ?&P Guar *ope-:t::3î::"i, in" :3;,'îfi r:'îffi;:'åiuoîãä! I :::'ülTf i:i:iå?.i"itot::;T:::i"iiåi-;"¡locarpurchases(PeP)or4'4Bcraverase cost eol-tålernaicine P[ii?;;:,^:tî--"ishted each year.. ditf erence bet-weén the FERC-approved of the p&p cannot exceed the (birled to Hope ) and comrnodiry of the Ro-;;l;- ="r,"aur" P&P pr ice rises "o*ponuot-tá extent-tf-,ã-ure:-ghted áverage $1 . f 0 per Dt. tf,. (aiter subtracting tl" S1'10)' resulting price_""iiing of above the f"-*,rrti;ii"á by the.dekatherm equivalent rhe differen".-;ïi of the PçP) and credited 4.4 licf (resardless If "fiåä-i;this determinition";i :lttved and ad justment is to the cost or-r.rrri"å. t!an. a rate change Puï?uant to made in a rate piã""uairrg other P&P will be rhe präå;ä;i^'i"rll"" of the achieved recent Rure 42, of servi;;-I";;1 allov¡ed in the most priced ar ttre cost the case in which this Rule ¿z iroceeding p=ããuãing final ustrate : åä: is rnade ' To il-l "=ui-ã"t Rate $3.49 D'1. RQ ComnoditY 1.10 Dt nãte Differential çffi Dt. or iã.ss (1,069 Btu) Per Mcr ' the commitment to a P&P Program-not and tirat íts rel-íeve HcPe @zes of that commitment does Cornmission's utãtptun"e the lowest cost dePendable 9as of i-us ,"=pon,iUiiity to acquire supply Robert R. Rodecker General Counsel 'West Vírginia PubIic' Service Commission Decenber 28, 1983 Page 5 per Mcf a penaltlr ff the weighted average P&P-price-weÏe ç2'-65 to the' cost of of lrrf x A,A B;f oi ç"++o,ooo-wãu]d ne credited service.IftLleachíevedPePislessthan/-.4Bcf,thepenaltyin )lrI Lo be ç440'00¡' and the penaltv would continue f t"¿Î!!i:-'l::::::td Iìowever bel-or,¡ also woul-¿" -ñpf V ín' the' absence oi ?t"1' ' iftheachievedPaPisgreaterthan4.AeEE;tL,epenaltywould-lì:'ere be no penatty under continue to be ç 440 ,0 0 0 , and would paragt:aph XII below. XII Shortfall PCng-llY Forthesecondthrougbthefifthyearsofreorganíza-guarantee ín tion, to the Hope Ooes-íot neet its Á.1 Bcf "*lãot if above, a P&P shortfall penalty will- be any year ¿"r"riUãã-in comrnodity cornponent ca]culated at the dif ference båtween the RQ uo"iug" príce of p&P. For e>:ample, assuming an and the weighteã per Dt, an average P&P rate of $2' 39 Re comnodity rale of çi.¿-g -'S would be calcu- per Dt, and a Åf,Ártiaf f of ect' the penalty lated as follows: .5 Bcf converted to Dt >i $1.1¡ = $588'000- XTTI. I'orce }ôai eure ot"' In the event of Bope being--rendçred un1bI1--!y-,f pttãgtupn.Ír guarantee io provide 4'4 maieure to carry out its year for the EFoFIocal pui"nrs.s anã ptóOoätion (pçp ) Per year? toiio*ing the daté of reorganization' second through fifth u'd full particulars of it is asreed th;l-ã" iropu't ;;;;;i, ;":l::. (60) *iitinõ to Éfre Commission within sixtlz such foree ry;;;"-ir,- oDr the.obligations days after tneËuii"r,"" or'tr,L cause rel-iec ofllope,sofarastheyareaffectedbysuchfPTlç'maj-e-ure'sha1l continuance of any inãET]îty so caused be suspended during the so far as possible' no longer period, and such cause ånurr but for Any shortf all in P&P ' be remedied rr,ith all Ï.uu."onuËrã-aispatch. shal-I not be Bcf subject to t"iã.-naje-ure suspension below 4.4 põÞoseñs provided in paragraph XII repriced for rateñaking in which any susPen- herein during tbe year oI years of oþeration with Hope pro*plfy shali provide the Commission sion is invohed. end .n9 siial,l with written notice v¡hen such calse-is at an lo*ptyful1 p&p so ãuring the next succeeding the obligation =orp"iãão that the P &P year of op"ruiiãn f ollowing- susp"tts¡.oÁ; Provided, shaI1 ,hi;;"is- ;;ñ;;ã-¡V of suspension oblisarion ".rriuã uppfiËable"irtue P&P obligation under be in addition to any oth"t*iÁã -f this paragraph paragraph )íï herein; ut9 pto,tia"o- urther , that ä;'=ffitffir'ãr'XI]IforcemajeureProv,=,-o.,shallnotbeavailabletollopeafter ãl"rátion rolrowins rrre dare or Robert R. Rodecker, Gene::al Counsef w"=i vitginia Public Service Commission December 28, 1983 vage þ ill- its aggregate ?&P obliga- reorganizaLion, and Hope shar-r f ulf year XI no laler than the end of Lhe seventh tion under paragraph (subj'ect to penalty for norr- f ollowing the dãte of reorgu'irãtion cornpliance as fiovided in þaragraplr )rII)' as employed t The term " f orce 4qi eul:e " ^h1t"1:--?l1t- include, oTi'=;:li ffi t"' .:!:^õt^,t?i: "#Ë å ac!: ::IìT:=:"t"i:1- ::itr'".:,outs oI utrle! J-¡ruuÐL!lur aiäi"ir,ã,,"" , .demics,_:l _:n".' T::: T 1 o 31"*0, "?;:,'iiå"=l;i.i= t:":ll^Î1t landslides, *ut=, bloclcades, insurrections',= er^rmq f Ioodsu , pï ;; ; ;;; ; ; ; - - iiäï i"i'"Ëi"Ë""iil nilil";;;; - I t1 ! : :? " I :.,'l?iä' å,'|;: i ;,EI i3' ii;"iï;i?å' i;;';; - unn ";'õ, ti'ã:!u::: s t ut - :' ?:,:i". 3?':;"; tiiu' t i ;;;;";;' --ã î . ^?n1.:i'f,,.T:: :'n : i . ill.""?'iil:';"l r" :: i :*î ^ -:: "å"*Ï t i i #;" - n 3 Ì =! ?: l.n^t'" TiiÏt "it'å'iti" =, ::bil"î ^ :i :: :' ;l::i";:,.:¿:iä:I'1"åÏ"';;;;;; !; ;;i1il?íY*:'.-1'::ï=i: 3:"'or ä::;iil'"i-i'äÏi;';'-lineä ot pipl I llîoi1-1tt^^:?^:::i'" ffiï:ïä:ri: ä;î; i; ;;;;inins'rnãterial and equipnent. XTV, Hope' s Transportation Assurances ín its ra.tes a4Y charges fcr IloPe will not reflect suPPlies: transportaiiãn by Transmission of the following A. All gas produced or purchased from,1"l9:1.1=ases' p'ãaú"liån faeiliii=i, and contracLs retained by Ilopeonthe"tt="ti"Á,aut.ofreorganization.Thisp:::l::?1- includes all gu='*hi"n may be produced or may be serrzed by transmtssron by Hope in areas which lease or rl"äË"ãgä^'uiã-iã0, and nol presentlv under contract ' from local B- All gas produced by HoPe ttti purchased suppliers up Lo 4'i eci each year through lh" iTear 1988,límitedtothedifferenãebetween4.4Bcfandproduced or purehased bl' rhe volumes ot á"J";";;;11y any year' Ilope under rarairaph A next above in Attachnentlisadraftletterconfirmingtheeontenlsby rnyself and sent to of this-ïñ"ãi"Iárv'üþóñ paragraph )irv which *i-ri u" signed ;;" trre reors anizatíon ' Assurances )ív. Transmission' s Transportation íca1ly ordered. to, do so by FERC I Unl-ess specif transportation of sup- Transmission will'not bill r:åpe for !i'rr pliesdescribedinXrVnextu--bou"-Transnissiona].sov¡illprc- tor- uope at FERC-approrzed rates for vide r,ransportltio,-, ãf gas of 4'4 Bcf Per year alt of Hope,s transportation-neeaË in excess Generaf Courrsel Robert R. Rodeclçer ' !üest Virginia Public Service Commission December 28, 1983 Page 1 Lhrough]gBBanr]forallofHope'sgas.transportationrequ].]:e_pro- And, 1'tu.,=*iis¡-oñ i'¡il-l agree promptly to nents thereaf ter. Hope and e>lpeditiously to víde such service wherrever råquirea_uy that is necessary to seek appropriaLe regulatory ãËpio"uf'-wheie- provide such tiansPórtation' Attachrnent2isadraftlettelconfirmingthecontentsan-apProp=l-?!:----, of this paraeïaph lv v¡hich *iir-u"-:1si:1-bv upon reorganl-- Transmission ot?iciat and sent to you ímmediately z ation XVI !iithdrawal of Stipulation & Agreement with FERC on The fott'ãppi"""¿-filed b)' vou on behalf of the I'{ovember 22, 1983, is in approving the comnrission- upon issuance oi -i'r'nnc otã"i ro the commission, . the reoïsanization"ü ;;ä-;;;iÃlu"lory the reorganization' comrnission \"'iu wíthdraw it=";;;;=-itio" to XVTf Aqreements with Transmission FollowingissuanceofFERCandsEcordersapprov].ngin adwance' under said reorganization, Ilope *r11 reguest approval 24-2--L2, ;i a dervice-ÀsreeÎ:l:^l:l:::: Ëope west virsinia ðode Gas Transmtssaon Gas, Inc. and :-tt af f iliate Consolidated to which' Hope purchase from corporation, P;;;";;' îil1 ttope in excess of Transnission all natural gu'-i=ft'ireA by, volumesofgaslocallyproduced'and.purchasedbyHope.Aproattached as Exhibít P to forrna copy of ,iiO se-rvice eãiãut""t is tirea i., oocilãt-Ño. cPB0-346- Hope also will rhe applicati_on- approval of a Management reÇuest the Conmission's advance a forma agt"=;;nt between H;;; ?lÞ- Tr.ansmission' Pro serviees I,1 to said application' copy of which is attached us-ixr'ibit the oD December L2' 1983r HoPl wiLh As you lcnow, base!lt:-U rate and a peti-tion for aforoval of gas cost ' Cornnission to É:- tssued' when FER. and SEC tariff changes for llope c"=i-ii:'' , ordersareissuedínform'utisfactorytothe!!estVirginiaThis filing is intended comrnission, effective Ju.,ouiy-i; igB4-. tid';ñii"uÉr" ptå"i=io''t oÎ this agreement' io "o*pry IftheforegoingsatisfactorilyreflecLsouragreement, Counsel- Robert R. Roôeclçer I General West Virginia Publ ic Serviee Comníssion December 28, 1983 Page B indicated befov¡' please sign both duplicate originals where and return one to me ' retain one """"otãJ'original, SincerelY, F+,Mu RalPh J. Bean RJBrznP Attachments ( 2 ) Accepted and agreed to this Lday or a '"* , LsB!' â/,"/,( EXHIBIT BLH-2 BEFORE THE WEST VIRGTNTA PUBLTC SERVICE COMMISSÏON ORIGINAL CASE N0. 99-0462-C-PC HOPE GAS, ÏNC. Application for approval for transfer from me'rger oi- all of the stock of its parent, Consolidated. Natural_ Gas company to Dominion Resources, Inc. TRANSCRIPT OF PROCEEDINGS had and testirnony adduced at the administrative hearing in the above-referenced matter, held on July 12, 1999, ât 9':30 â.ffi.r at the Public Service Commíssion, 201 Brooks Street, Charleston, Kanawha County, West Virginia, before Charlotte R. Lane, Chairman and Otis Casto, Cornmissioner, pursuant to notice duly given to all interested parties ' REBECCA L. BAICER Cert,ified Court RePorLer P. O. B,ox 7822 Cross Lanes, West Vírginia 25356 Phone: (304) 759-2471 Attendíng Reporter: Jennifer L. Evans' c.c.R. 60 1 MR. RIGSBY: Oh' absolutely' t would think a 2 that, for example, íf f used ot'her states as 3 reference point. The focal company, wheLher it be an 4 LDC or an electric company would continue to be 5 regulated and continue to provide the pipe to the 6 home or the wire to Lhe home - And would continue to 7 provide those kinds of services- I The guestion then becomes who market's the 9 electricity? And in many places, that/s done through 10 an unrequlated marketing affil-iate that has to be 11 approved by the ]ocaf commission in accordance with 12 the legislation that may exist. But absofutêfY, this 13 cornmission woul-d be intimately involved in any of 14 those kinds of decisions. 15 CHAIRMAN LANE: I can't remember exactly, 16 but from the reorganization hearing that I,ìIe had in 17 January, Lhe Commission may have referenced an 18 earlier letter relating to the headguarters in 19 clarksburg of either Hope or cNG, f can/ t remember 20 exactly -- was ít HoPe? 21 COMTU]SSTONER CASTO: CNG. ÁL')a CHAIRMAN LANE: CNG. Do you contemplate 23 that you will maintain the same l-evel of presence in 24 .Clarksburg that you currentJ-y have after thj-s merger 61 1 if it's approved? 2 MR. RIGSBY: That's our intent.. With mY 3 remarks I wanted t.o hoPefullY make it clear that i^¡e 4 would maintain the corPorate headguarters for both 5 the gas transmission as well as t.he headguarters f or 6 Hope Gas in Cl-arksburg. 7 And as far as the l-eve1 of employment B subject to everything I¡Ie've said herer wê would 9 envision the merger to have minirnal impact on 10 employment. 11 CHAIRMAN LANE: Then you would renew your 12 commitment to seek our approval if you útere going to 13 try to move the headguarters out of Clarksburg? 14 MR. RIGSBY: You/re in a better position to 15 determine what has to be approved or not. But we tb certainl-y would come to this commission bef ore we 17 would ever do anything. 18 CHAIRMAN LANE: And I understood your 19 testirnony that you/re current purchasing practices 20 for Hope 1n which you have in the past rel-ied very 21 heavily on local production would not change. )) MR. RIGSBY: That's my understanding' 23 CHAIRMAN LANE: And you have testified that 24 you have picked Pleasants county as the site for a EXHIBIT BLH-3 CONFIDEI{TIAL EXHIBIT BLH-4 PH Gas ExhibitNo. CPK-14 Proposed Conditions Financial Conditions ratemaking purposes wili be 1. The existence of an aequisiiion premium for determined uniler the uniform system 9f Accounts (Account 114). : Any acquisition prernium recorded on BBIFNA Peoples' books will be the permanently excluded from rate base in establishing future rates.subject to Commission' s jurisdiction rate proceedings, Transaction and J, BBIFNA Peoples will not claim, in any firture and set Transition costs to oomplete the transaction as such items are identified No' CPK- fortlr in the Response to Interro gatory OCA-5-3 (see PH Gas Exhibit PH Gas will not be 13). Costs íncurred to issue debt at BBIFNA Peoples or I as part of itre considered Transaction or Transition costs and may be submitted provide service, embe ded cost of debt in ftrture rate proceedings. costs to zubmitted as part including systern costs, to BBIFNA Peopies' customers may be of operating costs in future rate proceedings' a asset of any Transaction 4. BBIFNA Peoples shall not seek deferial as regulatory 3 above; such costs or Transition costs identified in the ñrst se.:rtenoe of Paragrcph shall be borne exclusively by Peoples' shareholders' not purposes of providing 5. Costs for any non-regulated capital projects or for excluded hom rate service to BBIFNA Peoples' retaii utility customers will be the cost of capital base and relateil financing costs will be excluded to estabiish entities other for ratemaking purposes as will revenues. from services provided to than retail utilitY customers. 6. BBIFNA Pàoples' cost of capital used in establishing retail natural gas dishibution rates shall reflect the risk associated with a stand-alone natural gas distribution company' 7. BBIFNA Peopies or PH Gas shall íssue and maintain separately issued debt held by investors not affiliated with BBIFNA or its affiliates, unless the Commission authorizes to the contrary 8. BBiFNA Peoples will not request, and OTS, OCA and OSBA will not advocate or propose, a capital structure for ratemaking purposes which is outside the.range of capital stuctures employed by comparable gas distribution companies. 9. BBIFNA Peoples long{erm debt ratio (excluding working cápital) will not fall outside of tho range of 45% to 55% of total capitalization for any period longer than one year withoutnotification to the Commission, the OCA, OTS and OSBA. 10. LDC Holdings' consolidated long term debtratio (excluding working capital) as a percent oftotal capitalization shall not exceed 60% for any period longer than one year absent ppproval ûom the Commission. Any request for approval will be considered on an expeditedbasis, if so requested. 11. BBIFNA Peoples will be ring fenced from other BBIFNA-owned companies as described in the Joint Application and in the Response to Question OTS-8, attached hereto as APPendix B. t2. BBIFNA Peoples shall not do the following without Pennsylvania Public Utility Commission ("Commission') authori zation: a,. guarantee the debt or credit instruments of BBIFNA or any b. mortgage utility assets on behalf of BBIFNA or such affrliates; or c. loan money or otherwise extend credit to BBIFNA or such affiliates for a term of one year or more. 2 Books and Records 13. BBIFNA Peoples shall maintain reasonable accounting controls and pricing protocols to govern transacticins witll afñliates, and provide the Commission, OTS, OCA and OSBA reasonable acoess to the books, records and personnel of Peoples' affiliates where necessary for the Commission to adequately revíew Peoples' purchases ofgoods or services from those afñliates. r4. Upon written reQuest; PH Gas and its subsidiaries will provide the Commission, the OTS, the OCA and the OSBA reasonable access to the books and recoids, officials antl staffof BBIFNA Peoplas and its subsidiaries. However, nothing set forth herein shall constitute or be interpreted as a waiver by PH Gas or its subsidiaries of its right to raise haditional discovery objections to any such requests, including, but not limited to, objections on the basis of relevanäe and privilege. In addition, before responding to any such requests, PH Gas and its subsidiaries shall be permitted to require the imposition of protections they deem necessary to prohibit disclosure of proprietary or confidential info¡mation. 15. gÈtFNe Peoples and BBIFNA will provide, upon request, to the Commission, OTS, OCA and OSBA, in connection with rate proceedings and other proceedings before the Commission, where relevant, presentations given by BBIFNA or BIFFNA Peoples to common stock, bond, or bond rating analysts, that directly, or ' indirectly pertains to BBIFNA Peoples or any afFriiate that exerciies control over BBIFNAPeoples. 16. BBIFNA.Peoples will seek Commission approval of all new or amended agreements with afüliates consistent \ryith Chapter 21 of the Pubüc Utility Code. 17. PH Gas and its subsidiaries shall provide the OTS, OCA and OSBA with a copy of. any reports filed with tho US Securities and Exchange Commissíon upon request. 18. For the 3 calendar years following closing, BBIFNA Peoples will provide an annual report to the Commission as to the status of all commitments made in any settlement, Corporate Cost Allocations 19. BBIFNA Peoples' corporate cost allocations will include a rent charge for the percentage of space occupied by employees who provide ser'¿ices to an affrliate, and a supplies charge for supplies the ernployee may use in providing services to affiliates. 'costs 20. BBIFNA Peopies' corporate cost allocations will provide thåt all incurred by PH Services to BBIFNA Peoples will be provided at cost. 27. BBIFNA Peoples' corporate cost allocations will include appropriate charges for letters of credit and sureties and the revolving oredit agreements. Management 22. BBIFNA will not permit a change in ownership in BBIFNA Peoples without prior Commission approval if such change would result in a change in control under the then-applicable Commission standards. 23. The CEO of BBIFNA Peoples will be amember of theboard ofPH Gas. 24. BBIFNA will contínue to maintain BBIFNA Peoples' corporate headquarters in BBIFNA Peoþles' seryice area and in or near Pittsburgh, Pennbylvania. BBIFNA agrees not to move Peoples' headquarters outside Peoples' service territory without advance approval.of the Commission. 25. BBIFNA Peoples commits to maintain field offrces in its service territory ahd staffing levels, as appropriate, to provide safe and reliable service. ReliabÍlity and Customer Service 26. BBIFNA commits to make customer service metrics a priority. Areas of focus will ínclude (i) call center representatives' knowledge, (ii) call center representatives' courtesy measures, (iii) percent of calls answered within 30 seconds, and (iv) call abandonment rate, in accordance with the Rebuttal Testimony of Michael J. Cyrus, 27. BBIFNA will provide a report to OCA, OTS, and OSBA regarding the first full twelve calendar months following initiation of service by the seleoted customer service vendor. Such report will outline additional actions expected to be taken in the following year to further improve custorne¡ service. Such report shall be filed for each of the three 12 month periods following initiation of service by the selected customer service vendor. 28. BBIFNA will commit to assess and identify areas of necessaxy improvement and submit that analysis.to the Commission,. OCA, OTS and OSBA within 90 days of closing for their review and comment. This review will additionally outline proposed opporlunities for improvement of customer service .and the associated metrics, outlining the performance as to the customer service metrics. Universal Service 29. BBIFNA Peoples will continue to fund its Customer Assistance program ("CAP') consistent with its needs analysis approved in conjunition with the Dominion Peoples currently approved Universal Services Plan. 30. BBIFNA Pçoples will be permitted to recover CAP costs under Dominion Peoples' existing recovery mechanism for CAP costs. BBIFNA Þeoples may propose changes to the recovery mechanism, which any party to the Settlement may oppose, for review by the Commission. 31. BBIFNA Peoples wíll match customer contributions to its Hardship Fund up to $300,000 of shareholder fi.lnds annually and up to $50,000 in administrative frnds for a threelear period commencing January 7,2070. BBIFNA Peoples will review possible ways to increase outreach to customers to attempt to increase customer contributions and provide a report to the Commission and OCA. 32. BBIFNA Peoples agrees that it will make al[ reasonable efforts to expend LIURP funding available each calendar year. CommunÍty Commitment 33, For a period of not less than five (5) years, BBIFNA Peoples will provide corporate contributions and community support in southwestem Pennsylvania at least at levels substantially comparable to the levels provided by Dominion Peoþles in2007. 34. Services that are currently. performed for Dominion Peoples outside of Pennsylvani4 such as call center support, customer billing and payment and cuStomer relations, will be retumed to Pennsylvani4 increasing employment and economic development in the Commonwealth 35. Dominion Peoples wilt continue to comply with the Commíssion's diversity policy, 52Pa. Code $$ 69,80i-69.809, Gas PurchasÍng 36. A BBIFNA Peoples' officer (the "Reqponsible Officer') will be responsible for the review and independent evaluation of all substantive changes in contracts for gas supply transportation, storage or procurement obligations ("Gas Supply Services"). Any such contract will remain a contract between BBIFNA Peoples and the provider of the Gas Supply Servioes, 37, The Responsible Officer for Gas Supply Services at BBIFNA Peoples will either be individuatly qualified in gas supply matters or employ such expertise' 38. Following closing, BBIFNA Peoples will be obligated to the tenns of the then current purchabing plan approved by the Commission for Dominion Peoples for the remainingagreed upon term. BBIFNA Peoples will provide such Gas Supply Services through Dominion Resources under the Transition Services Agreement ("TSA"), a contracted procurement vendor, or BBIFNA Peoples employees, hereafter refened.to as Procurement Services Provider ('?SP'). The PSP will follow the gas purchasing plan, .as approved by the Commission, unless 'circumstances require variation from the plan and the Responsible Officer at BBIFNA Peoples approvqs changes to the plan. 39. Commenoing with the ærnual Section 1307(Ð proceeding inirnediately following closing of the transaction, BBIFNA will present a gas purchasing plan to be employed by the PSP during the next term of a Section 1307(Ð application period to follow gas commencing the following October 1. The PSP will be required lhe purchasing plan, as approved by the Commission, unless circurnstances require variation from the pian and the Responsible Ofñcer at BBIFNA Peoptres approves changes to the plan. 40. Should BBIFNA Peoples' conhact with an external PSP, BBIFNA Peoples will include provisions in the conhact with the PSP to provide all information to the Commission and Parties that would be required to be provided by BBIFNA Peoples if it we¡e purchasing gas supplies subject to the Commission's discovery and confidenti ality rules. i I Retail Supply Competition 41. BBIFNA Peoples will convene a collaborative conference with interested parties, including the OCA, OTS, OSBA and interested natural gas suppliers, within twelve months of closing in order to develop a sftategy to promote retail natural gas supply competition, Lost and Unaccountetl For Gas 42. Pursuant to the settlement in Dominion Peoples 2008 1307(f) proceeding, DominionPeoples committed to the following: Domínion Peoples will ímmediately initiate steps'to begin monitoring (Jnaccountedfor gas ("UFG") levels on its gathering system. Domínion Peoples wíll begin to quantify UFG levels ss soon as possible once an ínitíal detailed operatíonal review of íts gatheríng system ís conducted. This rwiew is needed in order to separately identify and segment, emong other thìngs: a. all gas measureînent poinß (and assocíated vofuìmes) where gas is delivered from the gathering system ínto the transmission system; b. all end-use customers (and associated voluries) thø't are Iocated on the gatheÈìng system; and c. all gas used in the operation of compression and dehydratíon units located on the gøthering system. Dominion Peoples will provide avaílable gatheríng system UFG data and report relatedfindíngs in íts 2009 I307(l) proceeding' Folìowing the closing, BBIFNA Peoples will review Dominion Peoples' initial detailed operational reúiew of the gathering system and the -Commission's proceeding and BBIFNA Peoples' findings in Dominion Peoples' ]009 1307(fl 2010 L3O7(f) proceeding. It will conduct a review of Dominion Peoples' prior efforts to reduce UFG and examine altemative additional measures to reduce IIFG - including costs to implement such measures and potential cost savings that might be derived from implementing additional measures to reduce UFG. BBIFNA Peoples will present a report to OSBA, OTS'and OCA with regard to the results of suoh investigation no later than the filing of BBIFNA Peoples' 2011 1307(Ð proceeding. EXHIBIT BLH-5 CONFIDEI{TIAL !¿ ù lìrrd),¿u, ¿uuJ 0,u¿rr'rr lI lvllvLnù uvutl I I vr trvu r r vLLrìr\ CIRCUTT COURT OF FIICHOLAS COUN'TY' WNST VIRGINIA THOMAS FL,UFARTY, TRUSTEE OF RICTT1VOOD AR"EA C:OMMUMTY HOS.PI'I'AL, INC., Plaintiff, vs- CT1¡IL AcTlON NO.;09-c-;flL tìt - r'' c= \/ \+Ct ]]:- 'I'R^VELERS C¡ISUÄLTV Þ- '-L ) PROPERTY it,H COMPAJ\Y OF AMERICA and * I '.Of= COMMA,RCIAL INSURAI.{CE SERVICES' Cfi r>ã rNc., -i' ..::Y, & . :ffl Del'eudaut. ìP -.lä t\5 .,:t @ë coMPLAINT Now comcs the Plointifi Thomas Fluharty, il his capacity as Trustce of Richwood Area Conwrunity Hospital, lnc' and states as follows for his Complaint: Parties, Jurisdictio¡t, & Venue l. , Richwood Areâ CommunityHospital (helpinafier'R-I{CH") is a'West Vir'grnia cotporation which providecl meclical se,fl/iccs in Richwood, Nicholas County, West Virginia.. 2.. RACIi[ has ñled hankruptcy and Thomas FlulrarLy (hereinaftø "'I'rusteç Fluhartt') is the cu$cnt bankruptcy trustee lìor RACH,, 3' Delbndant Travelers Proporty Casualty Conrpauy of America (hcrcinafter "J¡4velers') is a foreign corporation that is i¡ the business of providing insurance to businesses located in" 'lYest 4. Çommorcial lnsurance Services (hereinafter "CIS') is a Virginia corpot¿ltion ¿ìnd a licenscd insu¡n¡rce agencywlrioh engagos intlrebusiness ofinsurancc iq among otherl:laces, l{AY-20-2009 TUE 03103 Ptl 304 872 7863 P, 02 vLllrl\ Mdy,l0. ¿uUY ù.UùrlYl lltvllVLn!} vvulll ¡ v¡ltvv¡ l is located in Charieston' Nicholas County, West Virginia. CIS's principal plaoe ofbusincss Kanawha CountY, West Virginit' an enrployeelagent of CIS and ¿t all timcs 5. Gail C¿ntçr is, upon infonnation and bolic{ i¡r thc busincss of insur¿nce relcvant to the claims assertecl in this Complaint, was eugagcrl in west Virginia and was acting on bchalf of cIS and/or lravelprs- bclief, an employcclagett of 6.. Mary Catherine Du6l Boardman is, upon information and in this Complaint was acting on Travelsrr arú at all timcs relevant to the clainrs '¿sserted ir¡ West Virginia" behalf olTravclcrs and eugaged in thc busincss of insurance assertedinthis ComplaürtasNcholas i 7, This Courthasjwisdiction overthepartios and ciaíms arosq DcfendantsTravelers countyis whereR-¿\cHis locatcdancl wherelhc causeofaction Dcfðndant Travclsrs, upon information and CIS couduct business in Nicholas County, and .}Vest Virginia. and bclicf, hæ no princþal officc or offioer in l'actual Background provided medical sorvices irr Nioholas County' g_ RAçH.prcviously operatecl a hospital and West Virginia' to ceqse hospital 0poratious' \. g. Itr May of 200g" RÂcll,s board of direotors rlccidcd on' but for tbe billing anci modical [ecords departments, \4'oro closecl 1 0. All hospital operations, oraboutJune 17" 2008' in the United Statcs Bankruptcy 11,. On July 1, 200g, RACII filed for Chapter 7 Banknrptcy Court fo¡ the SouthEm District of West Virginia' P, 03 HAy-26-2009 TUE 03103 Pll 304 B?2 ?803 tltor'¿u' ¿UUJ V I VVI IY¡ ll I vtlvLrlv vwvrr I I 12. The billing departmcnt continued operating until the end of the fi¡st week of Ootober 2008- l3 The merlical records tlcpartment coutinued to operate one day a wcckthrough October 2008 anclby Order olthe Bankrupúcy Court, continued to operate onc day amonth ûourNovenrber 2008 untilDecember 8, 2008' 14,, On Novcmb ør 19, 2008, Tn¡stec Fluharty requested the City ol'Richwood to shut off the water to the RACH building.. Thereafter, the main wate¡ supply to RACH wâs shut off, bru a ssparâtc watery supply line to the sprinkler syÊtêm remained open ancl operatiorral. t5 On Dcccmber 8, 2008, a fire protcction sprinkler sysfem at R-A,Clt burst and disoharged wîter throughout the building., 16, The disoharged water cnused significant daurage to the hospital building including darnage to asbestos contaiuing materials" As a result of thc watø damage, tlre hospite.l property has been severely damagod ancVor destroyed- Insurance Coverage T7 Defendant l'ravelers, tluough its looal agent, Defrrndant CIS, provided commercial iusurance to R:A'CH urdu a policy effective May L,2008 though May 1, 2009. Such policy providecl insura¡rce covsrage for proporty damage, iucluciing coveragc for property damagc causcd by water.. r8. RACH notified Travelers and CIS in May of 2008 of its plans to çease operations and CIS furfonned RACH on May 13, 2008 that Travclcrs would not continue any púpcrfy cÒverage for the hospital following the oessation of operations.. 19, On June 17,2008, RACH informed Gail Cater. an agcnl of CIS and 'l'ravelers, tlral lhe hospital was ceasùrg operaliorrs at the end ol thc day, but thot RACH desired to cçmtinue coverage for the real and personal property iocated at the hospital premises- t{AY-26-2009 TUE 03103 Pll 304 872 7863 P, 04 vvvltlr v¡trvut lvl ttI,¿U ' LVUJ ù'UÙf ill lìlullvLnu she was in the process of 20. Gail Carter, on behalf of CIS, reqpondcd by confinning th¿t would not cover the obtaining quotes for the promises and contcnts, given th¡t Travelers propcÉy afrer operations had cèâsed" the property the poliry pr'omium on or cancelled, cffcctive July l,2008 for the alleged nonpayurcnt of before.Tuly 1, 2008.. Gail carter, providcd RACII with quotcs ,') on July 1 1 , 2008, cls, through its cmployee/agørt for propofy Mary Cathcrine Ðufry 23. Subsequontl¡ on July 1 7, 2008, Travolcrs, through íts employoc/ago* reiustate the insurance policy for Bocrdmau, notified RACH that Travelers had decided to promium- propcrty damagc, upon RACII's paymørt of the arrcaÍage and new thc propcrty damage policy for 24.. Travelers aûd CIS, tluough their mutual agonts, rEinstatod R'{CH on or about August 18' 2008 ' krrew, prior to offering to rcinstate 25.. Travelers and CIS, ttlrough their mutual age,nts, oloarly oeasecl,butthatR*A.CH desired theinsu¡ance coverrage, thathospital operations atRACFIhatl hoSpital wâs vacant' to continue theproperrty insurance covcrage. despite the faot that the olaim with Ttavclcrs' but 26, After the l)ecember 8, 2008 incide,nt, RACH filed an i¡surancç policy whioh restricts covcrago such olainr w¿s dcniç An çndorsemerit if the building þad bccn vacant for more than sixty consecutive days" is used to cOnduct defrnes vacant as wben seventyporcent ormore of the squarc footage not customary operæions- *latant," wa8 according to dre policy language' 27 , Clearl¡ Travelers anrl CIS knew that RACII prior to decidiug to reinstate the propenty insurancc in August of 2008' P, 05 HAY-26-2009 TUE 03103 Pl{ 304 872 7863 I fYìily,l0' ¿uuJ ù'uùrur 11 lunuLflù uvulll I vll\vu¡ I vLLl\l\ It v v v r ZB,, f¡urther, Travelers and CIS know that RACH andits Trustee dcsircd to continue theproperty damage insurançe coverage lbr R tCH, rvheu Travclers decided to rcinstate the coverage in August of2008. Zg. By changing its prior position (i-e-, that it would not iusure RACH after the ccssation of normal hospital operations) and by reinstating thc policywithknowledge ofRACH's etahrs and insruance cxpectations, Travolors exprêssly and implicitly agreed to provide property COUNÎ I Declaratory Relief 'fravelers Property Casualty Company of Amcricr 30. RACH alleges urd iuoorporaLes by reføence all preceding paragraphs and allogations sct forth in this Complaint. 31 .. This ctaim is brought pursuanL to Rule 57 of thc ll¡est ltlrglnia Rules of Civi| Procedure, and thc Ltndorn Declaratory Judgmentslc¡ found in llesr Virginia Code, $55-13-1 et seq. 32.. Travele¡r' decision to rciustete the property d'amage insuranco policy prior to the DeoEmber 8, 2008 insidedt and at ¿ti¡re when Trovelers knew that the propertywas vricant constitutes a waiver of the vacancy provision and 'I'ravelçrs shoulcl be estopped frorn retying ou the provision to rleny covorâgc ior the loss,, WHEREFORE, RACH le4nests that thc Court, pursuant to Rule 57 ol'the llest Vìrglnia Rutes ttf Civìl Procedure: (Ð advance this action on Lhe Court's calcndar and order a speerly hearing; (iÐ declare that Travelers o$'es ccivcrage for the December 8, 2008 incident; t{AY-26-2009 TUE 03103 P}1 304 872 ?863 P, 00 Mav,l0' IUUV ,J;U,tfM I\IUNUL¡Iù UUUNII UINUUII ULLI\I\ for (iiÐ tlcclare that RACH is ørtitled to its attomey fees, oosts, darnages aggravation and inconvnú¿îce, and othcr damages recoverablc under and Ha)æeeds aud any othen applicablc law; (iv)grafltR/\cHfr¡¡thgrrelicftheCourtdeernsappropriate. COUNTII Fatth Breach of Contrrct/Breech of coveùants of Good F'aith rnd Fnlr Dealiug/Bad Travelers Propcrty Casurlty Compauy of Americ¡ preceding allogations containcd in this 33_ ßÂCH restates and inoorporatos by referencc all Complaint' duties to doal honestl¡ 34. Travoler.s, as RACH's ilsuror, owes cxpress ancl implied contractual policy, about the fairly and in goort faith in providing Rå,CH with an insurance information madc under the policy covcragss provided by the policy, and in handlirlg RAçH's claims payncnt of 35. Although RACH fulfilled its contracftal obligetious to Traveløs by tendcring thc policy premiuurs and informing Travclcrs of II,ACH's plans to ceaso opcrations, implied Travelors intcntionalty, lcrowiugl¡ and continuaþ breached the express and ooverâge confractual duties it owed to RACH aud aoted in b¿rl faith by offoring to reinstate in Augrat of 2008 whcn Travelers lsrew that the hosprtal was vacant and that RACH wanted to continue fhe coverago, dcspite the vacancy- 36, RACHreasonabìyexpected thattheproperlywouldbe insured dorytitethevacnncybyvirtue to its vacancy, but ofthc fact that Travslors originally did not want to insure the property due then cbanged its position arrrl olfored to provídc the covcragc. vacancy provision' 37, thereaftcr, Tr¿velers refused to pay R {CH's claim based on the of contract and a 38, I¡avelers' failure to provide covffagc for tbc loss constitutcs a breach breach of Traveler's obligation f.o deal fairþ and in good faith with RACH- HAY-26-2009 TUt 03104 PÌ{ 304 872 ?863 P. 07 ll¡d, ¡ ¿ U ¡ LvVJ u,Uul-llr ll¡vllvLnv vvvlrr r vlrrvvr r vLLrrr\ 39. Tr¿velers'breach of contract, b¡each ofthe ooven¿rnts otgood faith and fair dealing, and acts of bacl faiLh haveproximatclycaused RA'CH to sufferr enormotls damages. 40,, Based on Travelor's knowledge that thc hospital was vacant al the time Trovelers issued the coverage, lravelers waived the vacancy provision and is estopped from rcþing on the provision as abasis for clenying RACH's claim.. WHEREFORE, RACH requests thàt it be awardcd judgnent against Travelers for thc following: (Ð specific performnnce of the contractual duties that obligate T¡avelers to pay all ínsurance coverages available to RACH underthe T¡avelers' insunnce policy; (iÐ conrpsnsatorydanrages caused byTravelers' breaoh of contract, breach of covena¡rts of good faitll anct fair dealing, and acts ofbad faith; (iiÐ llavseed's danages, inoluding attomeys fees, exponsçs, and damages for aggravation and inconvcnience; (iv) punitivo damagcs, to the extent allowed by law; (') pre-judgmont and postjudgment interest; and (o) otlrø damages that maybe specified as tlús actionproceeds- COTTNT III Breach of Fiduciary Duty Travelers Property Casualty Company of America Co¡nmercial Insurance Senices, Inc, 41. RACH restates and incorporatcs by refcrcnce all preoeding allegations contai¡recl in this 42. Therel¿tionshipbetweenTravclers and RACH and therelationship betwecn RACH and CIS resultecl in RACH placing spccial trust, confidence, and relianoe on Travelers and CiS, for l{AY-26-2009 TUt 03104 Pt{ 304 872 7863 P. OB lvldy.¿U,¿UUJÙ'UÙfftltllvllvLnuvvurrrrv¡r\vvrrvLLrrr\ T intef,est lÃthcn which RACH expectod that Travelers and cTS would act in RAcH's best any claims providing insur¿nce poticy information, insurance coYofagc' aud in baudüng made undet tbePolicY- thc course of dealings bstv¡een the 43 .¿\s RACH,s insurer and insurürce âg€,ût, and based upou a.nd to use all partics, Travelem and CIS had fiduciary duties to act in RACH's best intercst toRACll" ofthcskill, care and cliligcnoe at theirdisposal to firlfilltheirfiduoiaryobligations that RACH \¡rânted {l¡ll 44 Travelers and CIS breachcd their fi.duciary dcspite such knowlotigo, insurancc çOvèrâge lor thc vacont property ancl cOrrtents, but premiums for an Travelers anrl CIS provided propcrty insurancc to RACH arrd accoptcd insuranoo policy which includcd a vacancy provision- abovo RACËI's interest by 45, Travelcrs and CIS knew thot thcy were placing thoir inturests lbrpropcrly offcringtoreinstateproportycoverageandthorca.fteracccptingpolioypronriunrs coveragc theyknew was inconsistcnt with RACtrI's dcsircs and expectations' 46 RACH rolicd onTravElers and CIS to actin its bestintercst andto æsistRACllinprocuring the insurancc cover&ges it desired.. Suoh roliance, cornbincd witb'l'ravElers and CIS's thc damages specified in this breaches of thoir fiduciary duties, car¡sed RACH to suffer Conrplaint., andCIS forthc WHBREFORE,RACH¿enrandsthatjudgmentbeawardedagainstTravelers following; (Ð comPensatory damages; (iÐ punrtivc damages, as permitted by law; (üÐ attornoys' fees and exPÊnses; P. 09 t{AY-26-200n 1g¡ $3r04 Pt{ 304 872 7803 (iù damages for aggnua$on aûd inconveuience; (Ð pre-juclgment and post judgmont fuiteresü and (vi) other damages that may be specifiotl as this case continues. COUNT TV lVaiver / Equitable Estoppel Trnvelers Property Casualty ComFany of America 47. R-ACH rcstates and incorporates by reference all preceding allegations contained in tlús Çomplaint. '2008, 48. Prior to reissuing covcrago to RACI{ il August of Travelers krrew that R-¿\ÇH's busïness operations had ceascd and that the hospital was vacant, but that RACH desired to coutinue having insurance to protect the properfy and contents,, 49., Despite Travelers' knowledge of the situation, Travelcrs cxtcnded to RACI{ the opportunity to reinstate tbe insruancc coverage and induced RACH to rely upon Travclcrs for its insruance needs a¡rcl to continue its insurance oov€rage through Travelors, to R {CH's detrimcnt and damoge,, 50' Travolers' actions ofissuing an insurauce policywith a vacançyprovision, which it inter¡ded lo enforce, wâs âr1 act of bad faith as Travelers knew that RACH desired to oontinue the insur¿nçè ooverage for the ptopøty and coûtcnts, despite the vacancy., this act of bad faith results in a waiver of the vaoancy restriction. 51, Bæed on Tr¿velers' action$, Travelers should be equitably estoppcd from reþing ou the vacauçy provision to demy coverage.. V/IÍEREIìORE, Travelers shall be estopped from donfng covorage and judgrncnt should be cntered i¡ favor of RACH for thc following: 9 t{AY-26-2009 TUE 03:04 Pll 304 872 1863 P. 10 T (Ð the fi¡ll extcnt ofthe covcrage avaitable to RACH under the Travelers' polícy; (iÐ attorneYs'fees and experu¡es; (iü) damages for aggrcvation and insonvenience; (tÐ prc and post judg.mcnt intercst; (v) punitive damages, as permitted by law; and (ui) othe,r d.amages that nray be specific COUNT V Negligence Commerclal Insurance Services i in this \ SZ, RACI{ rcçüatcs and incorporates by refsrpnce all prccediug allegations oontained ComPlaint., 53. CIS, æ RACH'S insu¡ance agenf, owed a drrty of care to âct âs a reasonable and pnrdont in$urance agernt would aot in the sÈme or similar circunrstances- 54 CTS, as a liconsod insuranco agonoy, hrs exportise regarding insurance coveragos and speoifioally, insu¿uroe çoveragçs that proteot commcrroial property'. 55,, CfS negtigently, carelessþ, and recklesslybreached the duty it owed to RACH as it knew the í ! status ofRÂCg'sbusinoss oporations andknew thatRACH dcsi¡ed to heve coverage forthe hospital. 56.. Despite CIS'sknowledge ofRÁ,CH's situation and desfues in terms ofcovcragc, and despite CIS's own expÊ¡tise irr the insura¡rce business, CIS failed to procuto thc propcr insruattcc ooverage for RACII's needs and expeotations, prudent insurance tgeut would act under the 57 " CIS's brcach of its duty to aot as a reasonably sÍlluÊ or similar oiroumsta¡oe and f¿ilure to prooure the proper insura¡rce covcrâgo : proxinrately caused RACF{ io suffer the clamages specified in this Çomplaint. 10 HAY-26-2009 TUE 03104 Pl{ 304 872 7863 P. 11 WI|ËREFORE, RA.CH seeks judgmcnt against CIS for the following: (Ð coürpensatory damagos in an amount to be detcrmined by a jury; (iÐ punitive damages, to the extent that the jury finds that CIS's ¿ctions werc witful, wantou, recklcss, or intentional; (iiÐ prc and post judgment interest as allowod by law; (i v) attomeys' fccs, costs and expenses incurred in conncction with this action; (v) such othe¡r and fr¡rtl¡cr relief as the Court deoms just and appropriatc urrder lhe circumstanccs., PLAINTIFF DEMANDS A JI]RY TRIAL ON ALL MAT'I'I!]ITS ASSERTED THOMAS FLUHARTV, TRUSI'EB, RICHÌryOO.D AREA COMMT'NITY EOSPITAL, PLArN'r'rFF, BY COUNSEL; IVa. StateBarNo. i165) ROBERT A. CAMPBBLL (W. Va. State Bar No. 6052) R, CHAD DUFFIELD ('ff,Va. State BarNo 9583) IARMER, CLTNE & CAMPBELL, PLLC 746 Myrtle Road (253Ia) Post Office ]lox 3842 ------c - (304) 346-5990 II t{Ay-26-2009 TUE 03104 Pt{ 304 872 7863 P, l2 CASE NIO. 08-1 783-c- 427 HOPE GAS, fNC., dbaDOMNIONHOPE CASE NO. 08.176I-G-PC DOMINIONT RESOURCES, INC., HOPE GAS, [NIC., dba DOMNION I{OPE, and PEOPLES HOPE GAS COMPAI.{IES,LLC. DIRECT TESTIMONY OF BYROI{ L. HARRIS Rate Case On behalf of the Consumer Advo cate Division Of the Public Service Commission Of West Virginia Dated: Ãpri124.2008 1 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 2 A. My name is Byron L. Harris. My business address is 723 Kanawha Boulevard, East, 700 3 Union Building, Charleston,'West Virginia 25301. 4 5 Q. PLEASE STATE YOUR EMPLOYER AND POSITION. 6 A. I am the Director of the Consumer Advocate Division of the Public Service Commission 7 of West Virginia. 8 9 A. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND. 10 A. In 1976,I obtained a Bachelor of Arts Degree from Indiana University, where I majored 11 in history and economics. I received my Master of Arts in Economics from Indiana o'A 12 University in 1980. My Master's Thesis was entitled, Forecast of the Residential 13 Demand for Electricity in the Public Service Indiana Region." t4 "15 A. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION? .16 A. Yes. I have testified on numerous occasions in natural gas, telephone and electric cases. l7 I8 A. HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY OTHER ADMINISTRATIVE 19 OR LEGISLATIVE BODIES? 20 A. Yes, I have testified before the Public Service Commissions of Indiana, Wisconsin and 21 Minnesota. I have also testified before the Minnesota Energy Agency and the Minnesota 22 Pollution Control Agency. I have also presented testimony before the Commerce 23 Committee pf the United States House of Representatives. 24 2s a. Do you SERVE oN ANY COMMITTEES ON BEHALF OF THE CONSUMER 1 1 ADVOCATE DIVISION? ) A. Yes. I rrm on the Executive Committee of the National Association of State Utility a J Consumer Advocates G\IASUCA). I was formerly the chair of the NASUCA Gas 4 Committee. I am also a member of the Staff Subcommittee on Accounting and Finance of 5 the National Association of Regulatory Utility Commissioners. 6 7 a. I'VHAT IS THE PURPOSE OF YOUR TESTIMONY? 8 A. I vrill present the Consumer Advocate Division's (CAD) position regarding the rate 9 increase request by Hope Gas, Inc. ('oHope" or "Company"). I will discuss the CAD's l0 proposed allocation of increases in revenues among Hope's tariff classes for each 11 ownership scenario. I will also explain why the CAD opposes Hope petitions to be 12 included in the Weather Normalization pilot program that was approved by the 13 Commission in case No. 07-2230-G-PC. Finally, I will explain why the Commission t4 should deny Hope's request to include a Pipeline Replacement Rider (PR Rider) in its l5 tariff. t6 17 a. WHAT IS THE CAD'S OVERALL REVENUE RECOMMENDATION IN THIS 18 CASE? 19 A. The CAD recommends that the Commission increase Hope's revenues by $3.3 million, or 20 approximately 7.0%. The CAD recommended rate decreases by tariff class are presented 2l on Exhibit BLH-I, The allocation of the rate decreases are based upon the results of my 22 Class Cost of Service Study (CCOSS), which I will discuss later in my testimony. 23 24 a. PLEASE DESCRIBE THE ISSUE AREAS COVERED BY EACH CAD WITNESS. 25 A. The determination of a fair rate of return for the Companies is addressed by CAD witness 2 1 Randall Shon. Ms. Deanna L. White will discuss the impact on Hope from changing its 'Weighted 2 method for storage accounting from Last-In-First-Out (LIFO) to the Average 3 Cost of Gas (IVACOG) method. CAD witness Ralph Smith addresses the remaining rate 4 base, revenue and expense adjustments proposed by the CAD. He also incorporates the 5 return recommended by Mr. Short and the adjustments recommended by Ms. White in his 6 calculation of the total level of base rate revenues which should be allowed. I am 7 responsible for incorporating the recommendations of Messrs. Short and Smith and Ms. I White into the Class Cost of Service Study. 9 10 A. PLEASE DESCRIBE HOW THE REMAINDER OF YOUR TESTIMONY IS 11 ORGANIZED. 12 A. In the first section of my testimony I will provide the Commission with a brief history of 13 Hope's residential rates and compare Hope's rates with other utilities in West Virginia. In 14 the second section I will present the CAD's recommended revenue increases for each 15 tariff class served by Hope. The third section will contain a discussion of my Class Cost 16 of Service Study (CCOSS). I will also explain why the results of my study differ from the 17 CCOSS presented by the Company. In the fourth section I will explain why the CAD 18 opposes Hope's request to be included in the Weather Normalization Adjustment Rate 19 pilot program. In the frfth section I will explain why the Commission should reject 20 Hope's petition for a Pipeline Replacement Surcharge. 2l 22 I. HISTORICAL OVERVIE\il 23 A. PLEASE BRIEFLY DESCRIBE THE HISTORY OF HOPE'S RESIDENTIAL RATES 24 SINCE THE LAST RATE CASE. 25 A. The table below shows Hope's residential customer charge, base rates, Purchased Gas J 1 Adjustment (PGA) and the cost of a I 3 Mcf usage bill as of January I't of each year since 2 2001.I have also included the impact on residential rates if the Commission approves 3 Hope's request in this base rate proceeding : Proposed 2004 2005 2006 2007 2008 2009 Base Customer Chg. $7.50 $7.50 $7.50 $7.s0 $7.50 $7.50 $13.6s Base 82.617 52.617 $2.908 $2.908 $2.908 $2.908 $s.29 PGA s6.72 s9.446 $1L766 $13.10 $9.963 $10.905 $10.90s 13 Mcf Bill $128.88 $164.32 $198.26 $215.60 $174.82 sl87.07 5224.19 4 5 a. HOW DO HOPE'S CURRENT BASE RATES COMPARE WITH THE BASE RATES 6 OF OTTIER UTILITIES IN WEST VIRGINIA? 7 A. The table below presents the base rate components and the base rate portion of a 13 Mcf 8 residential bill for the four largest gas utilities in West Virginia, including Hope, as well 9 as the base rates requested by Hope in this proceeding: Hope Hope Mountaineer Eouitable Bluefield Current Proposed Customer Charge $6.50 $6.50 $6.50 $7.50 $13.65 Commodity Charge $2.44 $3.70 83.42 $2.e1 $5.29 13 Mcf $38.22 $54.54 s51.02 $45.30 $82.42 10 l1 As this table demonstrates, Hope's current base rates are somewhat comparable to the l2 other large gas utilities in West Virginia. Hope's base rates are approximately 18% higher l3 than Mountaineer's base rates and approximately 20o/olower than Equitable's. This table l4 also demonstrates how Hope's proposed rate increase would cause its rates to far exceed 15 the rates of other large gas utilities. Hope's proposed base rates would be approximately l6 50% higher than those of the current highest rate utility, Equitable. I II. ALLOCATION OF RECOMMENDED REVENUE DECREASE 2 A. HAVE YOU PREPARED AN EXHIBIT THAT SHOWS THE ALLOCATION OF THE 3 CAD'S RECOMMENDED $ 3.3 MILLION REVENUE INCREASE? 4 A. Yes. Exhibit BLH-I shows the allocation of the CAD's recommended revenue increase 5 among Hope's tariff classes. I have used the results of my Class Cost of Service Study 6 (discussed in Section III below) as a guide in allocating revenue increases to Hope's 7 tariffs. A CCOSS provides a calculation of the rate of return associated with each B customer class based on the costs incurred by the utility to serve each class. When atariff 9 class yields a rate of return higher than the total recommended rate of return for the l0 utility, the rates for that class are higher than necessary to cover the cost of serving the 11 class. Conversely, tariff classes yielding rates of return below the total company return 12 have rates that are too low. As the Commission has noted in many of its orders,l the 13 results of a CCOSS should not be viewed as a mathematically precise measure of returns 14 for each class, but should be used as a guide for the allocation of revenue increases or 15 decreases. 16 The results of my CCOSS indicate that two of Hope's tariff classes, SGS and 17 LGS, are currently providing revenues substantially in excess of their cost of service. On 18 the other hand, three of Hope's tariffs, LCI-D, LCI-DS and WS are not even providing lg positive rates of return. The RS tariffclass is providing a return that is marginally higher 20 than the overall return for the Company. In order to provide apar:tial remedy to this wide 2l disparity in returns amongst Hope's tariffs, I have allocated a 14Vo revenue increase to 22 the three tariffs earning negative retums. This percentage increase is twice the overall 23 percentage revenue increase that the CAD is recommending for the Company. The I See, for example, Case No. 93-0004-G-42T, Order on Reconsideration, March 30, 1994, pp.6-7 . 5 1 percentage increase assigned to the RS tariff is the 7 .ÙYo overall increase. The remaining 2 revenue increase needed to reach the CAD's total recommended increase was assigned 3 on a pro rata basis to the SGS and LGS tariffs. 4 In order to provide the Commission with a measure of the impact of the CAD's 5 recommendations for each tariff class, I have calculated the average impact of the 6 recommended revenue increases in the last column of Exhibit BLH-I. The allocated 7 increases in revenues to the tariff classes receiving the largest percentage increase, LCI- 8 D, LCI-DS and'WS, have a relatively small impact on rates, from2 to 16 cents per Mcf. 9 On the other hand, the rate impacts of the recommended revenue increases for the other 10 , tariff classes range from 10 cents per Mcf for LGS customers to 29 cents per Mcf for RS 1l customers. t2 13 III. CLASS COST OF SERVICE STUDY 14 A. PLEASE DESCRIBE THE PRINCIPLES THAT YOU HAVE RELIED ON IN 15 DEVELOPING YOUR CLASS COST OF SERVICE STUDY? 16 A. The goal of any class cost of service study is to allocate costs amongst tariff or customer 17 classes in proportion to the level of costs incuned by the Company in serving each tariff 18 or customer class. Thus, the main principle to be followed is cost causation. By cost 19 causation, I mean the underlying factors which impact the Company's investment 20 decisions and therefore the level of costs for each tariff or customer class. 2l The most obvious example of the application of the cost causation principle is in 22 direct allocation. Where certain facilities may be identified as having been installed by 23 the Company for the purpose of serving specific customers, the costs of these facilities 24 should be directly assigned to those customers. Similarly, certain expense items such as 25 uncollectibles, and Business and Occupation taxes should be identified as being the 6 1 responsibility of certain customers andlor customer classes. These costs should be a directly assigned to those customer classes. J The majority of Hope's facilities are not directly assignable to specific customers, 4 however. These facilities are used to one degree or another by all of the Company's 5 customers. Application of the cost causation principle requires that these joint facilities 6 be assigned to the customer classes using factors that reflect the way in which costs are 7 incurred by the Company. 8 9 a. PLEASE EXPLAIN HOW THE APPLICATION OF THE COST CAUSATION 10 PRINCIPLE APPLIES TO THE TREATMENT OF DISTRIBUTION PLANT IN THE 11 CCOSS. t2 A. For a company such as Hope, the treatment of distribution plant will have a dramatic 13 impact on the results of any Class Cost of Service Study. Approximately 90% of Hope's t4 net plant in service is distribution plant. The single largest cost item in the distribution 15 plant category is the cost associated with distribution mains. Approximately 65Vo of the l6 original installed cost of distribution plant is comprised of the cost of distribution mains. 17 I have allocated all of the cost of distribution mains to customers using Hope's 18 distribution system using what is known as the Seaboard formula. Tlte Seaboard formala 19 takes its name from a decision by the Federal Power Commission (now the Federal 20 Energy Regulatory Commission) in the case of the Atlantic Seaboard Comoration (11 2l FPC 43, 1952). In that decision, the FPC determined that 50% of plant costs should be 22 allocated based upon a demand factor and 50%o should be allocated based upon a 23 commodity factor. 24 The appropriate method of classification and allocation of distribution mains is a 25 matter of significant debate in the natural gas industry. The method chosen inherently 7 I involves a certain amount of judgment. Anyone performing a Class Cost of Service 2 Study must recognizethat the costs incurred by the Company in installing distribution J mains will be impacted by regulatory and geographical factors that cannot be captured 4 within the confines of any classification and allocation scheme. The cost of installing 5 distribution mains will be affected by whether or not the main is located in a populated 6 areaand/or the needto cross natural and other physical obstacles such as rivers, highways 7 or railroads. The task for the allocation analyst is then to classiff and allocate the cost of 8 distribution mains in a manner which reflects how those costs are incurred by the 9 Company and how distribution mains are used by the customers served by the Company. 10 I believe the Seaboard fonnula reflects both how the costs of distribution mains 11 are incurred by Hope and how the distribution mains are used by Hope's customers. The 12 Seaboard formula is appropriate for Hope from a cost causation stand point because of 13 the dispersed nature of Hope's distribution facilities. Hope's distribution system is not an t4 integrated system, but rather is characterizedby a number of distribution clusters. The 15 size and cost of the distribution mains \¡/ithin these clusters will depend upon the load 16 profile of residential, commercial and industrial load within these clusters. The load l7 profile within these clusters is unlikely to mirror the total Company load profile. This 18 factor is captured by using both peak demand and throughput. t9 The Seaboard formula also reflects how the distribution mains are used by Hope's 20 customers by incorporating throughput in the allocation factor. A failure to classifr and 2t allocate a portion of distribution mains costs as commodity-related would allow those 22 customers whose usage was zero or very low on the peak day or days, when demand 23 measurements are taken for allocation pu{poses, to escape responsibility for the cost of 24 distribution mains, Use of a single peak day or a three-day peak solely for the allocation 25 of distribution mains will, I believe, place an undue emphasis on the weather-related (i.e., I I residential and commercial) contribution to distribution costs. The Seaboard formula has 2 the advantage of also capturing the impact on the cost incurred by the utility for 3 distribution mains that is associated with non-weather sensitive loads through the use of 4 the throughput portion of the allocation factor. 5 6 a. PLEASE EXPLAIN HOW THE COST CAUSATION PRINCIPLE APPLIES TO THE 7 TREATMENT OF OPERATING AND MAINTENANCE EXPENSES. I A. A general rule for any class cost of service study is that "expenses follow plant." What is 9 meant by this is that the classification and allocation of operating and maintenance 10 expenses should be determined by the classification and allocation of similar firnctional 11 plant accounts. As with any rule, however, care must be taken in its application. Each T2 account should be separately examined to determine if costs are included in that account 13 that may be directly attributable to certain customer or tariff classes. I4 a. CAN THE PRINCIPLE OF COST CAUSATION BE APPLIED TO THE TREATMENT -15 OF ALL OF THE UTILITY'S PLANT AND EXPENSE CATEGORIES? .16 A. No, it can not. There are certain costs incurred by the utility which can not be said to be 17 "caused" by any particular factor such as the number of customers, peak demand, 18 throughput, etc. A good example of such a cost would be the Company President's I9 salary. Obviously the level of his or her salary can not be said to be "caused" by any 20 tariff class, nor can it be said to vary with the level of peak demand or the number of 2t customers on the system. Such costs must be treated in a manner such that they will be 22 shared fairly and equitably by all customers on the utility's system. 23 24 A. PLEASE DESCRIBE THE PROCEDURES YOU HAVE USED IN DEVELOPING 25 YOUR CLASS COST OF SERVICE STUDY? 9 I A. The procedures I have used are those which should be applied in any Class Cost of 2 Service Study: functionalization, classification and allocation. Functionalization is the J assignment of costs according to major functions such as production, transmission, 4 distribution, etc. Costs are most commonly functionalized according to the functional 5 categories contained in the Uniþrm System of Accountsfor Natural Gas Companies. 6 The second step in developing a Class Cost of Service Study is the classification 7 of costs. The three principle cost classifications for a natural gas utility are: demand 8 (costs which vary with the level of peak demand imposed on the system), commodity 9 (costs which vary with the level of Mcf usage by the customers) and customer (costs 10 which are directly related to the number of customers served). 11 The final step in the Class Cost of Service Study is the allocation of costs among 12 tariffs. At this stage of the process, those costs that can be identified to be directly l3 assignable to certain customers or customer classes should be directly allocated to them. t4 The costs for which a clear cost causation nexus has been established will then be t5 allocated to the tarifß based upon the appropriate demand, commodity or customer t6 allocation factors. Those costs for which no clear nexus of cost causation exists will be t7 allocated based upon composite factors which appropriately share the burden of these 18 costs amongst tariffs. 19 20 a. PLEASE DESCRIBE HOW YOU HAVE APPLIED THE PRINCIPLES AND 2t PROCEDURES DISCUSSED ABOVE IN YOUR CLASS COST OF SERVICE 22 STUDY. 23 A. The procedures I have followed in the CCOSS shown in Exhibit BLH-}, are the same as 24 those outlined above: functionalizatíon, classification and allocation. At each step of the 25 process I have followed the principle of cost causation in determining the proper method 10 I to be used. 2 a J a. PLEASE DESCRIBE HOW YOU HAVE FUNCTIONALIZED COSTS FOR HOPE. 4 A. I have functionalized Hope's costs along the lines of the Uniform System of Accounts. 5 These functions are: production, transmission, distribution, administrative and general, 6 customer accounts and customer service. Certain costs such as income taxes are neither 7 firnctionalized nor classified, but are dealt with in the final allocation step. 8 9 a. PLEASE EXPLAIN THE PROCEDURES YOU HAVE USED IN THE 10 CLASSIFICATION OF COSTS IN THE CLASS COST OF SERVICE STUDY. 11 A. I have first classified Hope's rate base components by function. The similar functional T2 expense categories are classified and subsequently allocated in accordance with the 13 previously classified and allocated plant categories. t4 Rather than discuss the classification of all accounts, I will limit my discussion to 15 the major accounts. The allocation of Hope's investment in plant and equipment is t6 shown on page 2 of Exhibit BLH-2. The largest distribution plant account - account T7 number 376, Mains - has been classified according to the Seaboard formula, that is: 50% 18 demand and 50Yo commodity. The Seaboard formula has also been applied to account T9 number 378, Measuring and Regulating Equipment. The allocation of Meters, account 20 number 381, uses a weighted meter factor. The weighted meter factor reflects the fact that 2l meters for larger customers are more expensive than for smaller customers. The cost of 22 Services, Meter Installations, Regulators and Regulator Installations (account numbers 23 380, 382, 383 and 384) have been classified as customer-related and have been allocated 24 by the number of meters in each tariff class. The accounts functionalized as general plant 25 (account numbers 389 through 399) were not separately classified. With a few 11 I exceptions, general plant accounts have been classified and allocated based upon the 2 allocation of distribution plant, because these costs are primarily related to the operation 3 of Hope's distribution system. The most important exception concerns the allocation of 4 account number 391, Office Furniture and Equipment. Since the costs of computer 5 equipment and software are incurred to serve all of Hope's customers, regardless of their 6 use of the distribution system, I have allocated these costs using an allocator based on the 7 combination of sales and transportation volumes of all customers, 8 Intangible plant (account numbers 301 through 303) also has not been classified. 9 The major components of intangible plant are software for electronic metering and billing 10 activities. The investment in software related to electronic metering is driven by the need 11 to handle daily nominations, usage and imbalance levels for both sales and transportation t2 customers. I have allocated this account on a 50%o sales volumes and 50% throughput 13 volumes basis to ensure that both Hope's sales and transportation customers bear the 74 costs included in this account. 15 Distribution operating and maintenance expenses @xhibit BLH-Z, p.5) were t6 classified and subsequently allocated on the same basis as the corresponding plant t7 categories. The majority of the customer accounts and customer service and 18 informational expenses (Exhibit BLH-Z, p.6) have been classified as customer-related. t9 Administrative and general expenses (Exhibit BLH-Z, p.7) have not been classified, but 20 have been allocated based upon factors developed within the CCOSS 2l 22 a. PLEASE EXPLAIN HOW YOU HAVE CALCULATED THE SEABOARD 23 ALLOCATION FACTORS. 24 A. All of the allocation factors used in my CCOSS are shown on page 9 of ExhibitBLH-2. 25 For the purposes of the CCOSS, I have calculated two Seaboard allocation factors. The t2 1 allocation factor labeled "SEA-TPUT" is based upon the peak demand and throughput of 2 all customers served by Hope. The allocation factor labeled "SEA-DIST" is based upon J only the peak demands and throughput of those customers using the distribution system. 4 A distinction must be made between the two allocation factors since a significant portion 5 of the throughput on Hope's system goes to LCI-DS tariff customers who do not 6 generally uitilize Hope's distribution system. 7 The first step in calculating both Seaboard allocation factors is to determine the 8 peak demands of each tariff class at the time of Hope's system peak demand. For this 9 proceeding, I have used the same peak day usage data as contained in the Company's 10 CCOSS in the last rate case in which it performed a peak day study (Case No. 01-0331- 11 G-42T). As I will explain in greater detail below, the Company's estimated peak data t2 used in its CCOSS in this case is unreliable, and therefore the actual peak day usage data 13 from the 2001 proceeding is the best available data for use in this proceeding. t4 To calculate the commodity portion of the allocation factor SEA-TPUT, I used 15 the annual throughput for each tariff. For allocation factor SEA-DIST, I used the 16 throughput for those customers and made adjustments for the amount of gas used by t7 these customers that is not provided through the distribution system. For example all of 18 Hope's LCI-DS tariff customers and approximately half of the volumes sold to WS tariff t9 customers are not delivered through Hope's distribution system. I have also included the 20 small amount of sales volumes for the LCI-DS tariff in calculating the commodity 2l portion of the SEA-DIST. 22 23 A. WHAT ARE THE MAJOR DIFFERENCES BETWEEN THE CLASS COST OF 24 SERVICE STUDY THAT YOU HAVE PREPARED AND THE ONE SUBMITTED BY 25 HOPE'S WITNESS MR. MCKEOWN? T3 14. There are four major differences between the study that I have prepared and the study 2 submiued by Mr. McKeown on behalf of the Company. First, my study uses the CAD's recommended going-level amounts for revenues, rate base and expenses, whereas Mr. 4 McKeown's study is based upon the Company's proposed amounts for these items. The 5 differences in cost items will have an impact on the calculated rate of retum by tariff. 6 A second major difference between my CCOSS and the Company's is in the 7 treatment of distribution mains. Mr. McKeown has divided distribution mains into high I and low pressure categories. This treatment of distribution mains does not comport with 9 the reality of Hope's distribution system. Within each distribution cluster in which Hope 10 has facilities, the distribution facilities are integrated. These facilities were not 11 necessarily constructed in what would appear post-hoc to be a logical order: from T2 transmission to high-pressure distribution to low-pressure distribution. Rather, 13 disfribution systems are constructed and improved upon based on additions or deletions 14 of customers on various parts of the distribution system. Because distribution facilities 15 have grown in a more haphazard fashion based upon changes in load throughout the 16 system, it is inappropriate to attempt to artificially distinguish between the cost T7 responsibility of hi gh-pressure and low-pressure distribution mains. i8 A third major difference between my CCOSS and the study presented by Mr. 19 McKeown is in the calculation of the peak day allocation factor, In both my study and in 20 Hope's study, the peak day allocation factor is used, directly or in coqiunction with other 2t factors, to allocate the majority of the costs included in Hope's rate base. The peak day 22 allocation factors used in the Company's study are not based upon actual usage during 23 the test year, but were developed by projecting usage by rate schedule for an extremely 14 1 cold peak day.2 The main problem with using projected peak day information is that 2 there is no data to use as a 'reality check.' For example, when the Company develops a J peak day allocation factor for each class based upon actual data, the sum of the class 4 peaks cannot exceed the actual peak. This constraint disappears when projected data is 5 used. 6 The problem with Hope's projected peak day allocation factor can be illustrated 7 by comparing the peak day factor from the 2001 proceeding (which was based upon an 8 actual peak) with the factor used by Hope in this proceeding. Hope's peak day usage for 9 the RS rate schedule in this case is 1 1 8,000 decatherms (DtÐ, which is 295% higher than 10 the factor used by Hope in the 2001 proceeding - 91,000 Dth. This estimated increase in 11 peak demand is in stark contract to the decline in Hope's annual sales to residential t2 customers in this proceeding. Annual residential gas usage in this test year is almost 20% 13 lower than in the 2001 case. On Exhibit BLH-3, I have compared the Hope's peak day 14 and annual throughput from the 2001 with the amounts reflected in Hope's CCOSS in 15 this proceeding. Even though residential gas usage has declined, Hope has estimated that T6 peak day usage by residential customers will be substantially higher than in the 2001 I7 proceeding. In addition, Hope's projected peak day usage amounts for all other tariff 18 classes are not commensurate with the increase or decrease in annual usage for each T9 tariff. I do not believe that Hope's projected peak day allocation factors are appropriate 20 for use in a CCOSS. 2I A fourth major difference between my CCOSS and the study presented by Mr. 22 McKeown is in the treatment of Administrative and General ("4 & G")expenses. I have 23 allocated the various FERC accounts found under the general heading of Administrative 2 Hope's estimated peak is based upon an assumed peak day in which the weather is25o/a colder than the actual peak 15 1 and General expenses according to appropriate cost causation factors and past 2 Cornmission precedent. Mr. McKeown, on the other hand, has lumped all Administrative 3 and General expenses together and allocated them upon his prior allocation of 4 Distribution, Customer Accounts and Customer Services. Mr. McKeown's allocation of 5 Administrative and General expenses results in only $71,000, or one-half of 1% (0.005%) 6 of Hope's total $13.3 million A & G expenses being allocated to the LCI-DS tariff. Since 7 the LCI-DS tariff accounts for approximately 23% of Hope's throughput, Mr. 8 McKeown's allocation method is clearly unreasonable. 9 In addition, Mr. McKeo\ryn's allocation method is heavily influenced by the 10 allocation of one account - Uncollectibles Expense. This account is by far the largest 11 expense account and comprises approximately 30% of the expenses used by Mr. T2 McKeown to develop his A & G allocation factor. Clearly, changes in Hope's level of 13 Uncollectibles Expenses has little impact on the amount of A & G expenses incuned by T4 the Company. 15 The last Hope rate case in which the issues involved in a CCOSS were fully t6 litigated was Case No. 93-0004-G-42T. The Commission's decision in that proceeding t7 allocated A & G costs (excluding Pension Expense) using an allocator that was 18 comprised of one-half of the throughput allocator and one-half of the previously allocated t9 amounts of otherO & Mexpenses. Ihave allocatedA & G expense usingthis same 20 method, with one minor exception. I have allocated the cost of Property Insurance among 2t tariffclasses based upon the allocation oftotal plant since the cost ofproperty insurance 22 should be related to the cost of utility plant. 23 day on the Hope system in2007 and 45Yo colder than the 2008 peak day. t6 1 IV. \ryEATHERNORMALIZATIONADJUSMTENT 2 A. PLEASE EXPLAIN WHY THE CAD OPPOSES HOPE'S REQUEST TO BECOME 5 PART OF THE WEATHER NORMALIZATION ADJUSTMENT RATE PILOT 4 PROGRAM THAT WAS APPROVED BY THE COMMISSION IN CASE NO. 07. 5 2230-G-PC. 6 A. Hope's petition is simply premature. Although the Commission's order of June 19, 2008 7 in Case No. 07-2230-G-PC approved a Joint Stipulation between the Staff, CAD and I several small gas utilities to initiate a S-year pilot program, the Commission made clear 9 its intention to limit the program to small utilities. The Staff memo that was filed in 10 response to the petition of the small utilities had recommended that the Commission open 11 a general investigation for all gas utilities. The CAD objected to the Staff l2 recommendation to open an investigation for all gas utilities. The Commission agreed 13 with the CAD: I4 The Commission prefers to consider a specific, small pilot program, 15 as proposed by the seven utilities and CAD, instead of opening a t6 statewide proceeding as Staff suggested. A statewide general T7 investigation could be appropriate in the future. (commission 18 Order, dated January 29,2009) 19 20 To date, only two utilities, Bluefield Gas Company and Consumers Gas Utility 2T Company have met the conditions contained in the Joint Stipulation to apply for weather 22 normalization tariffs. Those tariff filings both occurred on February 27,2009. The first 23 rate adjustments using the weather normalization tariffs will occur in July 2010. 24 The CAD believes that the Commission was correct to limit the availability of the 25 weather normalization tariff to small utilities, at least initially. The Commission should 26 wait for a review of the results of the pilot program before approving similar tariffs for 27 large utilities. 28 t7 V. PIPELINE REPLACEMENT RIDER A. PLEASE DESCRIBE HOPES PROPOSAL TO INCLUDE A PIPELINE J REPLACEMENT RIDER TO BE INCLUDED IN ITS TARIFF. 4 A. Hope's Pipeline Replacement Rider @R Rider) would allow the Company to increase its 5 rates on an annual basis to recover the costs associated with a proposed Steel Pipeline 6 Replacement Program. Hope currently does not have an accelerated pipeline replacement 7 program. Exhibit BLH-4 is a copy of Hope's response to the CAD's Data Request A-17, 8 wherein the CAD asked Hope to provide a copy of its pipeline replacement program. 9 According to the Hope's petition, the Company proposes to file on August 31 of each 10 year to recover the costs of pipeline replacement costs that are not currently recovered in 11 rates for the l2-month period ending June 30. The proposed PR Rider would be changed 12 onNovember I of each year. t3 74 a. PLEASE EXPLAIN WHY TIIE COMMISSION SHOULD REJECT HOPE'S 15 REQUEST FOR A PIPELINE REPLACEMENT RTDER TO BE INCLUDED IN ITS t6 TARIFF. 17 A. Despite the Company's descrþtion of the PR Rider as an "innovative cost recovery l8 mechanism" it is simply a way for the Company to circumvent the Commission's 19 ratemaking process. Hope's investment in distribution mains and services account for 20 more than 75% of the Company's cost of plant and equipment. The changes in Hope's 21 rate base are driven, in large part, by changes in the levels of investment in these 22 accounts. Therefore, to a large extent the accelerated ratemaking procedures proposed by 23 Hope will constitute a rate case that would normally be conducted pwsuant to the 24 Commission's Rule 42. 25 The Company notes in its petition that it would experience "significant regulatory 26 lag" in recovering costs associated with pipeline replacement without the adoption of the 27 proposed rider. The Commission must keep in mind that in the context of changing base 18 I rates, regulatory lag is a good thing. The standard regulatory test for inclusion of 2 investment in plant and equipment is whether or not the plant and equipment is used and J useful. Unfortunately, it is not practical for the Commission to scrutinize each and every 4 work order for each project that the Company engages in between rate cases. Regulatory 5 lag provides an important economic disincentive for the Company against over-building, 6 gold-plating or otherwise investing in non-economic plant and equipment. Under the 7 Cornpany's proposal, the timeline for the approval of the PR Rider is even shorter than I the timeline for the review and approval afforded the Company's purchased gas costs. 9 The 61-day period between the proposed filing and the November I effective date will 10 not provide the Commission with any meaningful opporhrnity to review the costs 11 associated with the program. l2 The manner in which the Company proposes to implement the PR Rider is 13 discriminatory. Although the investments to be included in the PR Rider are for T4 improvements to the distribution system, the Company proposes to exclude distribution l5 customers served under special contracts from the cost of the PR Rider. Dwing the test t6 yeü, special contract customers served from the Company's distribution system T7 accounted for almost 25%o of the total throughput on the distribution system. The 18 Cornpany's proposal will cause non-special contract customers to pay for the cost of 19 pipeline improvements that will benefit special contract customers. 20 In addition, the Company has not shown that an accelerated pipeline replacement 21. program is necessary. The table below shows the number of feet of pipe that Hope has 22 replaced from 2001 through 2007: 23 24 ?s 26 27 28 t9 Year Feet Replaced 2001 67,848 2002 60,086 2003 138,539 2004 126,414 2005 69,865 2006 47,999 2007 63,135 1 Source: Response to CAD Data Request DH-6, file2.3.7.l.xls 2 This data shows that Hope has been able to accelerate its replacement of pipeline without J the need for a specialtantr rider. In addition, there does not appear to be a pattern of 4 declining pipeline replacement which, over time, which might give rise to the need for an 5 accelerated program. 6 7 a. DOES THIS CONCLUDE YOUR TESTIMONY? 8 A. Yes, it does. 20 Exhibit BLH-1 HOPE GAS, INC GASE NO.08-1783-G-427 Allocation of CAD Revenue lncrease Going-Level Going-Level Allocated Rate Return Revenues lncrease lmpact RS 6.77% $31,971,910 $2,235,929 $0.29 SGS 14.18o/o $9,1 15,737 $388,178 $0.13 LGS 16.06% s1,707,540 $72,713 $0.11 LCI-D -9.32Yo s3,141,429 $439,386 $0.0e LCI-DS -37.22% $638,974 $89,372 $0.02 WS -3.29% $452.524 $63.294 $0.16 Total 5.44o/o $47,028,114 $3,288,872 Exhibit tsLH-2 Page 1 of9 e $ È Ëggä Ë äc{ äËggsxäËil 3 ñ8o- O s à È à< egååEäÈË;I * 8sEË g z g Ë É. FåËä ã l Ë ñlul-l- TÉ 3 SS3* e3b N ç.C\Ì\lO E H ñ --9o ø (/) r tll 8 Þ EsEä {'r l- F H i 98# Eåãã"PËRr Ëci-r -ä4ozg óg p Ë õ Þ ËääË Ë Ë o gBxg+.'E J il Sga= e ñ És$*nHiä$ ' ä äEg"e N p uJ o o z z üH-n 5 zryúY 2tr t-- n EFãS ft H -* ññtE Ë Í b tJJ? > Exhibit BLH-2 Page 2 of 9 e}Ë ËËË"Ëä""ä ËEË"Þs$å*råË ËËËå"3"Ëä"ËË qËË ;ËÈ"ËË""g åsË-g;"""$ËgË gËËå"t.;Ë"äË sËs ËåË"Ëä""È Ëgg"gËeåsÈFåË ËgËË"Ë"Ëä"Ëä tt) Jo gãäå"ä"äË"ËË Bg Ëgã"$å""Ë ËåË"ËäEBBSËË zi- (,U) ñ# u) ()oÉÍî Få Ëåä"åä..Ë såg"g$ggËeËË ËËËg.Ë"Ëä.ËË ?ì5@- ¿ñóLvô^ ozoo-t c; ã pã g rulF åËË"Ëä." Ë$g"gËggeÈ ÈËEÈ"å"ËË" gËiËsËEË*fsggHsäuËËËFÉËËËÉaËEFËtË e a= 3 . -3 ,23,Ë ggå â?,Ë Ë Ê Ë "Ë e*=a=' 1z Ê Ë fr*g,ecËËg rË ¡g,rË**ËååËs Ë rt¡Ë¡ËgääËËË Ë Ë Exhibit BLH-2 Page 3 of 9 o^ c!* o .',F- F ç o à bY ðE oo3-õ-o pg"r"*ga â è ê 8g àã;ä""gsËsÊ =F 9. o) ?q 4'7'4 Fë +s o_ ôt H. fi. ô Õ:\ ô E fl[""$ -å Ë gB"Ë"*ËË ê ø -o @ e€- 3 E 4q îb c\¡ _ Nb+eä-ss- Ë.e RÊ o ô Fi o e @ @ v-3g ll) Ëä ñË Oo- ËË""Ë9ssä ËË"Ë"gäå si+ ?ø I os R I o S Sge F.Ë Õ o iu-æ:: o oci ;ü fl-È-eeñ'sãpä @ @ Xl\t @ E-ñ à|âùrgge$ äË"$"iÈË sq 9å lll sB Ë ue$- Nu BH 53 .t) g B€ña R$j e,?g 8 s iä""$ sä qq*E'eF.aä:rÈ.8 =35 ä Ë Ë +çå qÞ 8$ frìb"o- Hcié P s9 3 5 P 6 HE ä. E=Ë_ i Ë.s H.s Oz= u) -äÉ É B ãå " $.$ suB""Ë Ë B äFfçB F3 oj F äå"Ë"ËçË "?@ o oó )l b o (o-;8ñ J t- gg" 83 o Ë" FuÞ I ¡: o, F- sË ËË""äËgäË äËäË RS ss,¡-7,q E sÞÞ ?Þ" qø P pr-hr-hr-r- I F F- **-F F >2v2v22 k dd ttïÞHË g 33H3H33 q fLfLõfLõfLfL düo ÞÞ ÞÞ9,' F ÉgEEËq g E 6 E FE c,,sË*Ë,g g Ë i t s ¡ É tsË¡u¡eÊä e ËË ã Ë l Ë Exhibit BLH-2 Page 4 of 9 sNottN.t RË eñ'_;-g ä I s ã .'DñP..'@à 3 a ä Ë * ? ã J(O^ü.ØØF- Øtê Õ!tEil=ä Ë$Ë'33Ësà+äØro @E ñ=rEE5s Ø P- U) Ãran oxof,cxco=s .F(úOoO .Y ËçÉ'õ äg et ü o=Ë¿Ptr(nØ';i.YL ,fi Ë 'î I õ Ê Exhibit BLH-2 Page 5 of 9 F* o) (o Ø: a aRaaàH =ñ @ @@ å"åstg*"*;äsË Þ ØÌ- (oo) 1E I a*aBgN g*äå** aaaÞBBH 98 Ø@ Ë s (os(O F* ç5 O o'f)-o O E @- õ c.) æ e+ (o rCO Yon3_ (âñ(â(#ç¿ñoSooLB J e\¡ U) Ø æê å'ËËux""gBggË IU Ë ,zØ l:LU (o F* cO :ìo- Øo)o c{o O ¡ËäågËg,g,*rlågg,sgËåËË,,ËE Exhibit BLH-2 Page 6 of 9 cO F* o)o)o o) o) co a .EqooÈ o \o o F*_ tO- Øç¡@@6 6t) *3ñ**R BaaSË r(Ð = @@ @@Ø l'\ F* l- Ø fìo cr) cÐ(f)Þ- ro^^Næ _o_^o o q+ **gd*$ooÐ-9o5- ;à+àÉ;ã BgEBS p J Ø-. e ØØØ rr co\t$c{ artaart q *ägË-Ë BaaEH ä æ@@æ@ !o rs (o Ø U) tll Ø (o z (o ul (o- .fL o $õ eo) c¡ofr ¿.co= o) -co= g c', cÐ N CDF-P e.¡b¡oFFE rrro) oSæP ç? () ..t. P Bdgu as' *4a53 a$aa$ (oF- óèg ro@o $- fÞ tqE ñ ñ \ ø Øs+ 4 ê @ ozãHc; I ããE 3 Ø Jul- O) Í) .2 + 26 , RPE I o co9 (o^ OF ã." r 5 il.* c\,1 o *il93r = a$aa$ Ca- o É.- g**gb g o J ä J ãss'B @ z 9 tÉ. *t É. É. É. t-FF-t- l.U l.JJ > TIJ lfff FFI.UF fLfLÈfL q tçexs uJtü0ltü F.FFI- .Dr-Éu)Øo Eä ÅZz o YH Az çn E E= '* H 2 8, ? r,J8å e HÉ P õ ñ iã ü s ã ü e'Ë!,Ë # .EE,õ z øe Ë x¡eËËEi saËÊEi .,E EË8Í q äåËEcEË äåEËËË HåEåËË Ë Exhibit BLH-2 Page 7 of 9 slf) rO e oqt å ä*ËäËË*g'-s"ËË F e$ o) dO) $ q o- å sËåsåË*å,-ä'Ëå * Ø $ (oô¡ ç Ë H.sÞË$r*Ë*8s.hR H. d q gËgE*ãF .+cf) ,"$ãE t à ec.t o o co s t* } Ë$Ëäñä*F'"J.ËË ä Ø .i|@ $- (o H o È ä;ËËgÞ*;'.Ë.ËË ä .+ ,ïH Ø 4cQ¡n + ¿ô æ c\¡ - sf p (o r ËsÈåËg*s,"g"ää ä o, frEEt^zZ. @ Iu¡!l (o .+ t- BE oi l.c) J(J(9 í s gäägËÈ*s,,ã.ËË ry o, c\ Ë @ z qËEËËËËËËËË=Ëq Ê. trJ ul=zÈfr.ur cP ;o Ë 2 Ë 2 E P- ãç. u Ë H ggËgggËgËËåsËË,ë=åË Exhibit BLI'1-2 Page I of 9 r* t^ O l- N C{^ 0O oB q gxs-o$-os_oil_ o S(fJ *S8È83Þ-sEõ_ifi& æ 9 dà**B*g*g sËt@ oJõ co-co a Or rrr q enä*Ë*Ë.å ggsgäsË $(o ?J @ n:E e sgB*g'Ë.F CO r\ e, äFsÞä;Ë 3g'@ U) @ z co o lOr F- o)- ro O o) o) l n ßÈË*$*ä.3 .to l-o ;gSäffig ?ñ @ Yoc\¡ llJ oc?o ZeZ \to - @:- s\ øtÈ ã p RË óÉff åËË.Ë.F.ä E¡\ FgggË$Ë te Hc¡Û Ozu oto co -uO(I) : NrOryæ õõ @ F- går$ssÞ o É ËËË.È.å.Ë +s o e J J zØt- dl q ffix*x=Ë geiisË É. z o Ø9 tr H6 N l- (J tr IIJ ] É. r-- o= *É. (í) gH ã. i- Eg Ë H zo -z gEãiØå É fik :2 È Px I å qil IJJ É, 2 .O.O=E - å Eärì Lll nr€ ?28€.Ëq i E-s,-Ëq ù-r t- fiËFËËEEËãË Ë3ËËËäËË ØÉ5 t-- Exhibit BLH-2 Page 9 of 9 -Ë -Ë sg sË eÈ* *þ * 3Ë 3s *H Ëg åË $p äc ån as Ëu 5u 'Ë eü *g -Ë* gs +Ë t sX sË ËU sË =H ;g Ëu cg sÈ Êg Ëg s g* ËÈ sH sg $Ë gg s$ ge ås $U åË =Ë fiu *¡ *e ¡f Ëg or+(oo Ër* SË $+* Sñ :n Ëf E+* z@<ä ó*sb* *3-ó* *t sË È* i-x B* z\ H $H sË :g åË ge *Ë FË åg su $* ËÈ ng rg ns Ag Èg Ëg äËË Éäg &** -Ë ËË FÈ rg sil i* =Ë Ë* uu i* ä* ** ** i* iu Ë* NOÐ ;SBPbo **HH-EË-$ P.ã Èqtqtoto-Ñ þE E S E Ñ Z Ë$g*$.fr.H.Ë-:gEfrfig* &Ê -ñño'Ne B8' oÉ. t*uJ -5iqùufrtúz s ^a:lJ g H È o 6 FÐ t i gä Ë g E È æ s JHÈ * Þ 3 4 ñ ñ É = BÉ E ãE 1==sãnre ãceËËËEoðsõå,ÈEeõii åËËs#iiËeËF.ge3õûi9äÈbÉ=-1ër¡i E E F fr Ë F F E E; P g Ë E Ë Ë Þ Ë s Exhibit BLH-3 HOPE GAS, INC GASE NO.08-1783-G-427 Peak Day, Throughput Allocators, 2001 v. 2008 2001 Case 2008 Case lncrease/Decrease Peak Throughput Peak Throughput Peak Throughput Allocation Allocation Allocation Allocation Allocation Allocation Volume (Dth) Volume (Dth) Volume (Dth) Volume (Dth) Volume (Dth) Volume (Dth) RS 91,422 10,480,644 118,417 8,384,573 29.5Yo -20.0o/o sGS 37,106 3,424,613 42,190 3,112,977 13.7% -9.1Yo LGS 6,286 693,656 7,131 726,754 13.4% 4.8% LCI-D 25,994 6,294,870 24,555 5,033,688 -5.5o/o -20.0Yo LC|-DS 28,861 11,349,575 22,394 5,270,509 -22.4o/o -53.6% ws 5.176 246.325 6,892 424,623 33.2Yo 72'4o/o 194,845 32,489,683 221,579 22,953,122 13.7o/o -29.4o/o Exhibit BLH-4 Page I of2 Response to A-17 Dominion Hope Äccelerated Pipe Replacement Program Dominion Hope does not cunently have an Accelerated Pipeline Replacement Program, . and pipeline replacements are identified and completed as part of normai operations. Current Replacement Pro sram The current annual capital investment to replace facilities, on average, is approximately 12 miles of steel pipe and 800 steel services, at a capital expense of $3.7M ($2.8 for mainlines, and $0.9M for services). Pipeline replacement projects fall into one of three distinct prioritization areas: compliance, emergency unplanned renewals, and planned renewals. Projects that fall under the first two areas (compliance and emergencies) are non-disuetionary in nature, and completed on an as-required basis. Planned renewals are evaluated for capital investment based upon various operating conditions and factors of the pipeline (age, material, size, leak history, operating pressure, etc.). These projects are discretionary, and æe prioritized by local field operations. Proposed Accelerated Replacement Program Dominion Hope proposes a 20 year progrrrm to replace bare steel (cathodically protected and unprotected), coated steel (unprotected), and cast and wrought iron pipe, and all bare steel company services (main-curb). Assuming that all such pipe would be replaced this represents approximately 1,400 miles of pipe, and 22,300 services. The total mæ 1 , i 15 services pff yeæ. This does not take into consideration infiation, or cost of living adjusünents. However, as part of the risk assessment process, Dominion Hope will evaluate the need to replace individual pipelines and prioritize certain pipelines for replacement. Accordingly, we do not expect that all bare steel (cathodically protected and unprotected), coated steel (unprotected), and cast and wrought iron pipe, and all bare steel company services (main-curb) would actually be replaced and that the actual capital expenditures underthis progxam will be less than the maximum figures. Current budget estimates for annual capital investment under this program is $8.0 M to replace pipelines and $1.3 M to renew company service lines. Pipelines would be prioritized under a four-tier evaluation. 1) Bare transmission pipelines that provide overall system capacity and supply 2) High pressure distribution trunklines and beltlines that supply major service areas 3) Targeted segments with unusual or significant operating characteristics, such as diameter ) 72", weather sensitive pipelines, or major single feed dead end pipelines 4) Assessment or prioritization tool that risk ranks pipelines, and leverages geo graphic efficiencies Tiers I and 2 represent pipelines operating at higher pressures, and are critical for maintaining reliable service. These pipes would be targeted for replacement within the first 5 years of the program. Tiers 3 and 4 utilize risk and operating data such as leaks, outage history, maintenance costs, etc. They would also consider and leverage areas v/ith Exhibir BLH-4 Page2 of 2 Response io A-17 greater concentrations of replacements to maximize resources, and minimize return trips to neighborhoods and inconvenience to customers. , .l CASE I\O. 08-1783-G-427 HOPE GAS, INC., dbaDOMINIONHOPE CASE NO. O8-1761-G.PC DOMINION RESOURCES, INC., HOPE GAS, fNC., dbaDOMNION HOPE, and PEOPLES HOPE GAS COMPANIES,LLC. DIRECT TESTIMOI{Y OF DEANNA LYI{I{E \ryHITE Storage Inventory Accounting On behalf of the Consumer Advocate Division Of the Public Service Commission Of 'West Virginia Dated: Lú2A--.]8 I a. PLEASE STATE YOUR NAME ÄND BUSINESS ADDRESS. 2 A. My name is Deanna L. White. My business address is 723 Kanawha Boulevard, East, J 700 Union Building, Charleston, West Virginia 25301 4 5 a. PLEASE STATE YOUR EMPLOYER AND POSITION. 6 A. I am employed as a Financial Analyst with the Consumer Advocate Division of the 7 Public Service Cornmission of West Virginia. 8 9 0. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND. 10 A. In 1973,I obtained a Bachelor of Business Administration Degree from Marshall 11 University, where I majored in marketing and finance. I have worked many years in the t2 health care industry in various financial positions analyzing rate reimbursement and rate 13 setting. In 1992I became a Certified Public Accountant passing the exam on my first t4 sitting. 15 16 a. \ryHAT IS TITE PURPOSE OF'YOUR TESTIMONY? T7 A. I will present the Consumer Advocate's (CAD) review of Dominion Hope's (Company) 18 Adjustment 15 and Adjustment 76, both related to storage accounting issues, in 19 particular, Dominion Hope's switch from the Last In First Out (LIFO) to the TWeighted 20 Average Cost Of Gas (WACOG) method accounting. I will explain why the 2l Commission should reject Dominion Hope's Adjustment 15. I will also explain why the 22 Commission should partially accept the Company's Adjustment 76. The CAD agrees 23 with the concept behind Adjustment 76,buf does not agree with the amount requested. 24 1 a. WHAT IS YOUR RECOMMENDATION REGARDING DOMINION HOPE'S 2 REQUESTS FORADJUSTMENT 15 AND 76? J A. Dominion Hope has included ¡wo adjustments in its Rule 42 filing related to the change 4 from LIFO to WACOG storage accounting. In Adjustment 15, the Company is asking 5 for a $25 million increase in operating and maintenance expenses, to be amortized over 6 five years. In AdjustmentT6, the Company is requesting a $15.6 million increase in the 7 thirteen month average value of storage inventory to be included in rate base. I The Commission should reject the Company's request for Adjustment 15. The 9 requested increase to operating expenses in Adjustment 15 is essentially a double- 10 counting of the Company's requested increase to rate base in Adjustment 76. While it is 11 appropriate to change the value of storage inventory included in Company's rate base, the 12 Company improperly calculated the amount to be included. 13 t4 a. PLEASE DESCRIBE HO\il THE REMAI¡IDER OF YOUR TESTIMONY IS 15 ORGANIZED? t6 A. In the first section of my testimony, I will briefly describe the two adjustments that t7 Dominion Hope has included in its Rule 42 flJing related to the change in storage 18 accounting. In the second section of my testimony, I will discuss, in general terms, the t9 impact of a change in storage inventory accounting on Dominion Hope. In the third 20 section, I will discuss the Company's request for Adjustment 15. In the fourth section, I 21 will discuss the Company's request for Adjustment 76. 22 23 24 2 I I. Description of Company's Storage Accounting Adiustments 2 a. WHAT IS COMPANY PROPOSING FOR ADJUSTMENT 15? J A. Adjustment 15 is a going level adjustment which increases operating and maintenance 4 expense. Dominion Hope projected a $25.6 million dollar adjustment to reflect the 5 switch from LIFO to WACOG storage accounting. The Company proposed amofüzing 6 this adjustment in equal amounts of approximately $5 million over a five year period. 7 In Case No. 06-0605-G-GI, the Commission issued a decision which ordered I Dominion Hope to switch inventory accounting methods from LIFO to WACOG. The 9 Company claims it must use LIFO for financial reporting pulposes even though the 10 Commission has ordered the use of WACOG for rate making pu{poses. According to the 11 Company's witness Mr. McKeown, the $25 million adjustment captures the difference l2 between the purchased gas costs that will be recorded on its books and the amount that t3 will be recorded for ratemaking purposes. T4 15 a. WHAT IS THE COMPANY PROPOSING F'OR ADJUSTMENT 76? t6 A. Adjustment 76 is a going level adjustment which increases rate base. The Company is t7 proposing to increase rate base by $15,601,342 which reflects the increased value of its 18 storage inventory caused by the switch from LIFO to WACOG storage accounting. The T9 Commission's Rule 42 permits inclusion of the Company's thirteen month average 20 storage inventory in rate base. As with other rate base items, the Company will be 2I permitted to earn a rate of return on its storage inventory. 22 23 24 I II. Discussion of storage accounting 2 a. PLEASE EXPLAIN \ryHY A CHANGE IN STORAGE INVENTORY J ACCOUNTING \ryILL HA\rE AN IMPACT ON DOMINION HOPE. 4 A. The change in storage inventory accounting affects the gas expenses reimbursed through 5 the purchased gas adjustment. The calculation of the cost of gas sold is comprised of the 6 three following components: beginning inventory, purchases, and ending inventory. The 7 values for beginning inventory and purchases are fixed, but the value of ending inventory I can vary depending on the Company's accounting method for recording inventory; i.e., 9 whether the oldest (and typically cheapest) storage is sold or remains in inventory. 10 By changing the methodology for how storage flows from inventory, the value of 11 the ending inventory changes and the cost of goods sold also changes. However, the t2 Company does not lose money as the Company retains the ending inventory. The 13 Company, of course, will recoup its investment when it sells the remaining inventory. T4 15 a. TVHY ARE THE TTVO INVENTORY METHODS OF \ilACOG AND LIF'O 16 RESULTING IN DIFF'ERENT AMOTTNTS? t7 A. The LIFO and WACOG inventory methods have different cost flow assumptions. The 18 gas storage inventory is comprised of gas purchased over time at varying prices. This 19 presents an accounting dilemma in terms of the price that is assigned to gas withdrawn 20 from inventory and sold to ratepayers. Before recording gas expense, each company 2t makes a decision about the flow of costs, i.e., whether to charge customers for the last 22 gas purchased (LIFO-Last in first out), the first gas purchased (FIFO-first in first out), 23 or the weighted average price of all the gas in inventory flVACOG-weighted average 24 cost of gas.) I LIFO cost flow assumes that the most recently purchased gas storage inventory 2 will be withdrawn and charged to ratepayers. The Company charges ratepayers the cost 3 of refilling inventory at the prevailing rate in the year the inventory is withdrawn, not the 4 booked value of the gas actually withdrawn. If the Company refills the gas storage 5 inventory by years end, the inventory remains at the booked value. As a result, during a 6 period when prices have been rising, the value of ending inventory is generally close to 7 the value of beginning inventory and is typically less than replacement cost. I WACOG uses a different cost flow assumption. The gas withdrawn from 9 inventory is priced (and expensed) at the average cost of all of the gas in inventory. The 10 Company charges ratepayers for the average cost of the gas actually withdrawn. The 11 value ofending inventory is generally equal to the average cost. 12 l3 a. \ryHY WOULD A COMPA¡IY CHOOSE LIFO AS ITS INVENTORY l4 ACCOUNTING METHOD? 15 A. LIFO is useful for income tax reporting purposes in that in periods of rising prices, the 16 LIFO method maximizes expense and minimizes income tax expense. The higher costs t7 reported by the Company result in less taxable income and thus lower taxes. Conversely, l8 in periods of falling prices, the Company reports lower costs and more taxable income, t9 and as a result, pays more in taxes. 20 However, under the system of ratemaking in West Virginia, Dominion Hope does 2t not make a profit on purchased gas and therefore does not impact the company's income 22 tax. 23 I Q. WHY WOULD DOMINION HOPE OR ANY GAS COMPANY PREFER TO USE 2 TIIE LIF'O ACCOUNTING METHOD? 3 A. The most likely reason is that it lowers the cost of carrying inventory. Unfortunately, the 4 flip side is that it maximizes the cost paid by ratepayers. 5 6 Q. WHY IS TIIE ENDTNG TNVENTORY SO MUCH HIGHER \ryITH THE \ilACOG 7 INVENTORY METHOD? I A. The value of inventory is a function of quantity and price. Given that the quantity of 9 inventory is the same each month under both accounting methods, ffiy variance results 10 from differences in price. The months with the largest volume of gas in storage have the 1 I largest variances. 12 With its fiscal year ending two months into the withdrawal season (on December 13 31) the change in inventory accounting methods is magnified. If the fiscal year ended in 14 a month with low storage inventory, i.e., March or April, the inventory valuations for the 15 two methods would be much closer. 16 A review of inventory by month shows the variance in the amount of gas in 17 storage. The following chart shows Company's total MCF in inventory by month for the l8 five fiscal years between2004 and 2008. t9 Ending Inventory by Month 2004 to 2008 7,000,000 6,000,000 5,000,000 -- CY 2004 ¡r 4,000,000 * CY 2005 o cY 2006 = 3,000,000 * CY 2007 2,000,000 --r- CY 2008 1,000,000 aÊEãgi='3frEÈ€ Month I 2 3 In response to the CAD's Data Request No.S-l, Company provided its actual 4 monthly storage inventory values (which are based upon LIFO) and what the estimated 5 monthly storage values would have been under WACOG accounting from 1991 to date. 6 The following chart shows the monthly value of gas storage inventory using the LIFO 7 inventory accounting method for the period 2005 through 200g. 8 Ending lnventory by Month Under Lifo FY 2005 - Fy 2008 o $ss e$0 $zs = $20 $15 $10 $s $o ,{þk"'nò$e\"'W{$S"' I 2 3 The following chart shows the estimated monthly value of inventory for the same time 4 period if Dominion Hope had been under V/ACOG storage accounting: Ending lnventory by Month Under WACOG FY 2005 - FY 2008 ct, $80 .õ $70 Ë $60 $so $40 $30 $20 $to $0 o"$.*\r"'nò$e{S*ì$".å.$$s' I In looking at the two charts, it is obvious that the slopes of both charts are identical to the 2 first chart in terms of monthly storage volumes. The chart below shows the value of 3 inventory under both WACOG and LIFO for calendar year 2008. The monthly variance 4 in the inventory values under the two accounting methods ranges from a low of $1.7 5 million to a high of $37 million. The price of gas per MCF ranges from a high of $11.08 6 for gas stored under WACOG to a low of $2.587 for the gas stored in the 1991 layer of 7 LIFO. Value of lnventory by Month Gomparison: L¡fo vs Wacog FiscalYear 2008 o $80 tr $zo Ê $60 = $so + LIFO 08 $¿o -+WACOG 08 $30 $20 $10 $o ñ91 .s\ ìeó of' *oC ñe'ð ¡Ø' .Ø' ø"Q- èd Months 8 9 10 a. REX'ERRING BACK TO THE BASIC ACCOUNTING EQUATION F'OR 1l IIYVENTORY VALUATION, PLEASE EXPLAIN HOW A UTILITY IS l2 REIMBURSED F'OR EACII OF'THE COMPONENTS OF THAT EQUATION. 13 A. The value of a utility's beginning and ending inventory is included in the thirteen month t4 average value that is included in rate base. Through the Commission's Rule 42 1 procedures, the utility is permitted to earn a rate of return on the value of storage 2 inventory in rate base. Through the Commission's Rule 30C process, the utility is 3 reimbursed for the cost of purchased gas and the cost of gas sold. 4 5 a. HOW ARE THE COSTS OF STORAGE INJECTTONS AND \ryITHDRA\ilALS 6 TREATED FOR RATEMAKING PURPOSES UNDER THE COMMISSION'S 7 RULE 3OC PROCESS? 8 A. When gas is injected into storage it is treated as a credit to purchased gas costs. Stored 9 gas only becomes a purchased gas expense when it is withdrawn from storage. 10 11 a. FROM AN ACCOUNTING PERSPECTIVE, HOW ARE STORAGE 12 INJECTIONS AND WITHDRAWALS TREATED? 13 A. When gas is injected into storage, it increases the value of the utility's storage inventory. 14 From an accounting perspective, storage injections are more properly viewed as an asset 15 rather than a credit to expenses. The cost of withdrawals is treated as an expense. t6 17 III. Discussion of Adiustment 15 18 A. PLEASE DESCRIBE HOW THE COMPANY CALCULATED ADJUSTMENT 15. 19 A. Dominion Hope's calculation relies upon the model used by the Company to project 20 purchased gas costs. The Company ran the model for the period November 2008 through 2l October 2009 using two scenarios: one in which storage inventory is calculated under 22 LIFO and one in which storage inventory is calculated under WACOG. 23 10 1 The PGA model that uses the LIFO method results in total projected purchased gas cost 2 of $129.8 million. The PGA model based upon the WACOG method results in a total J purchased gas cost of $104.2 million. Dominion Hope's calculation using the model for 4 the LIFO scenario results in a storage expense for gas of $4,637,933. The calculation of 5 the model using the WACOG inventory method results in a storage asset for gas of 6 $20,939,957. Dominion Hope is requesting recovery for the difference between the 7 storage expense and the storage asset. The Company has subtracted the LIFO expense of I 54,637,933 from the WACOG asset of $20,939,957 to equal the adjustment of 9 525,577,890 which the Company proposes to amortize over a five year period in equal 10 amounts totaling $5,115,578. Dominion Hope claims that it should be allowed to recover 11 this difference between storage expense and the value of its storage asset. t2 13 0, \ryHY DO YOU DISAGREE \ryITH THE COMPANY'S REQUEST F'OR t4 ADJUSTMENT 15? 15 A. The Company is not experiencing an increase in operating and maintenance expenses due t6 to the change in storage accounting methods, Although the Company labels the different t7 amounts as purchased gas costs, the Company is actually incurring a change in the 18 composition of assets. The change in expenses associated with the switch in accounting t9 methods is exactly equal to the change in the value of the Company's inventory. The 20 increased value of storage inventory is recovered from the Company's ratepayers by 2t increasing the value of the Company's Materials and Supplies component of working 22 capital in rate base. 23 11 I 0. ASIDE F'ROM THE PROPRIETY OF' THE COMPANY'S REQUEST F'OR 2 ADJUSTMENT 15, DID TIIE COMPANY'S USE THE CORRECT TIME J PERIOD IN ITS CALCULATIONS? 4 A. No, the model provided by the Company uses the time period November 2008 to October 5 2009. The Company did not change its method of storage accounting in November 2008. 6 The Company would only change its method when the new rates from this proceeding go 7 into effect October 1,2009. 8 9 a. \ryHAT GAS PRICES DID THE COMPANY USE IN ITS CALCULATION? 10 A. For its LIFO based model, the Company used the estimated available rates for 2008 and 11 2009 of $10.6S6l}4dt and $8.S03¡lt4dt, respectively. For its WACOG based model, the t2 Company calculated the cost of storage withdrawals beginning in November 2008 based l3 upon the weighted average cost of gas cunently reflected in Company's LIFO layers plus 14 approximately 2 BCF of storage injections assumed to have been made in the summer of l5 2008. The cost of storage injections beginning in May 2009 were projected using gas 16 futures prices which resulted in an average cost of storage injections of $8.64844dt. 17 Based upon crurent gas futures prices, the projections used by the Company are much 18 higher than the actual prices the Company will experience when the change in inventory t9 accounting method is implemented. For the projected portions of both the LIFO and 20 WACOG models, the Company utilized projected Nymex settlement prices on September 2I 26,2008. )) 23 A. HAVE YOU PREPARED A FORECAST SHOWING THE PERIOD WHEN THE 24 NE\il INVENTORY METHOD WILL BE IMPLEMENTED? 12 I A. Yes, I prepared PGA models using recent prices for New York Mercantile Exchange 2 (NYMEX) gas futures contracts for the first year that rates will be in effect: October 2009 J to September 2010. The NYMEX prices I used are based upon settlement prices as 4 published in Platt's Gas Daily on April 17 ,2009. 5 6 a. WHAT ARE THE RESULTS OF USING THE PGA MODEL UNDER THE TWO 7 ACCOUNTING SCENARIOS WITII THE NYMEX GAS F'UTURES 8 CONTRACTS FOR THIS PERIOI) 9 A. Using the LIFO model for the twelve months ending September 30,2010, the available 10 rates for 2009 and 2010 arc $4.7261Mdt and 56.464,Ævldt, respectively. The updated l1 WACOG model results in a cost of withdrawals beginning November 2009 of $3.8844dt t2 and an average cost of storage injection in 2010 of $5.998/lt4dt. 13 The updated LIFO model results in total estimated purchased gas costs of 14 588,576,743. The updated WACOG model results in total estimated purchased gas costs 15 of $77,367,205. The difference in the two models is $11,209,538. Even if the t6 Commission \¡i/ere to agree that there should be an adjustment for the difference between 77 the two models, the difference will be much lower than calculated by the Company. t8 t9 IV. Discussion of Adiustment 76. 20 a. PLEASE EXPLAIN HOW THE COMPANY CALCULATED ADJUSTMENT 76. 2t A. The Company did not use the same PGA model to calculate Adjustment 76 that was used 22 to calculate Adjustment 15. Instead, the Company calculated inventory values using the 23 thirteen month average from March2007 to March 2008. 24 13 I a. DO YOU AGREE WITH THE COMPANY'S CALCULATION? 2 A. No. Once again the Company used the wrong time period to calculate its adjustment. J Also, by using a different method for Adjustments 15 and76, the Company created an 4 internal inconsistency. As I indicated above, the change in the value of storage inventory 5 will be exactly equal to the change in the cost of goods sold (purchased gas expense). 6 7 a. PLEASE EXPLAIN WHY YOU ARE REJECTING THE COMPANY'S METHOD I OF'CALCULATING THE 13 MONTH INVENTORY. 9 A. The Company has used inappropriate storage inventory volumes and natural gas prices in 10 its calculation. With regards to storage volumes, the Company's calculations are based 11 upon the test year, and include ten months of 2007 and three months of 2008. Dwing 12 2007, Dominion Hope had unusually high inventory balances as compared to other years. l3 The month-ending inventory for six of the ten months in 2007 ranked third in volume t4 when compared with the same months for last eighteen years. One of the months, August 15 2007,had the highest volume inventory of any August in the eighteen year period. t6 In addition, Dominion Hope used the prices actually paid during the thirteen 17 months ending March 2008. Gas prices during this period were among the highest of 18 any time in the last eighteen years. Curent gas prices are much closer to the median t9 price during those eighteen years. The contracts settled for future months as shown on 20 the NYMEX are much closer to the median than to the rates existing dwing the test year. 2l The Company's Adjustment 76 reflects an increase in the 13 month average 22 storage inventory of more than $15 million, or 9lo/o higher than the test year inventory. 23 The Company's use of abnormally high storage inventories and prices caused this result. 24 t4 1 a. WHAT TIME F'RAME BEST REF'LECTS THE ONGOING EXPENSE TO THE 2 COMPANY X'OR INCREASED INVENTORY COSTS? J A. Not only was the test year a period of abnormally high storage inventories and prices, the 4 fact is that the Cornpany did not switch from LIFO to WACOG accounting during the 5 test year. I considered and rejected avariety of time periods as not representative of the 6 ongoing costs to Dominion Hope for the increased value of gas storage inventory. The 7 goal is to use a time frame with both gas volumes and gas prices that reflect the most 8 likely expense to Dominion Hope of carrying the cost of the increased storage inventory. 9 Historical time periods \ryere rejected due to the volatility of both gas volumes and 10 gas prices. A multiyear average was rejected for the same reason. For example, the 11 ending inventory for March ranges from a low of 191,698 MCF in 2003 to a high of 12 4,771,625 in March of 2002. 13 The first year that new rates will be in effect (the period October l, 2009 to 74 September 30,2009) is not representative of the Company's storage inventory costs for 15 future periods. This period begins with a storage inventory of 4 BCF of gas with an 16 average price of $3.881. This is a one time phenomenon and when that gas is withdrawn, 17 it is not likely to be replaced at that price. It did not seem fair to use six months of 18 extremely low priced gas to represent the future ongoing costs of gas inventory. 19 However, once that gas is withdrawn, the subsequent injection season is a good place to 20 start the thirteen month average. It is the first month of injections under the WACOG 21 methodology and thus provides a time frame and gas prices that reflect Dominion Hope's 22 likely ongoing expenses. ¿5 I The volumes and cost of Dominion Hope's historical layers under LIFO accounting. 15 I a. Ho\ry DID YOU SELECT THE VOLUME TO USE rN CALCULATING 2 INVENTORY? J A. As I discussed above, a review of the historical periods did not reveal a period that 4 seemed representative. Even the multiyear averages did not provide a stable number. 5 The Company's PGA model provides projected volumes of gas inventory storage by 6 month for a 12 month period. I used the volumes from the Company's model for the 7 period beginning with May 2010 and ending May 2011. This period reflects the f,rrst full I year in which the Company's storage inventory will be determined by WACOG 9 accounting. Exhibit No. DLW-1 displays the volumes, NYMEX prices, and inventory 10 balances used in the CAD calculation. t1 12 a. HOW DID YOU SELECT THE PRICES TO BE ASSIGNED TO GAS 13 PURCHASE S/INJECTIONS ? 74 15 A. I used the NYMEX gas futures contract prices for each month as publishedby Platt's t6 Gas Daily on April 17,2009. I also used the basis differential from the Company's PGA l7 model.2 18 t9 a. HO\ry DID YOU CALCULATE THE ENDING INVENTORY BALANCES? 20 A. With the volumes and the prices known, it is a simple multiplication to calculate each 27 month's change to inventory. Purchases or withdrawals are added to the beginning 22 inventory balance to calculate the ending inventory. Each succeeding month is added to 23 the prior month to caleulate the .running inventory bal.anee. During injeetion season, 2 I should note that the CAD does not necessarily agree with the Company's basis estimates. I have used them here simply to eliminate a potential issue from contention. t6 I ending inventory increases each month. During withdrawal season the ending inventory 2 balance declines. J 4 A. \ryHAT IS THE ADJUSTMENT TO RATE BASE THAT YOU HAVE 5 CALCULATED TO REF'LECT THE SWITCH FROM LIFO TO WACOG 6 ACCOUNTING? 7 A. As shown on Exhibit No. DLW-I, I am recommending that the Company's 13 month 8 average inventory balance be increased for the test year level by $1,795,864. 9 10 a. DOES TrrAT CONCLUDE YOUR TESTIMONY? 1l A. Yes, it does. t7 I o=J zci E .c€ x Ë lU o .t,ñËe @_\€_bõ3 EÞ* ü38 3 ËË: OO(0c!OrO)rif\f(oçOOO \f O (O ôl (f) o) o N cÐ (O O vo -(o o - c)(oo')(ol.-c,oro)tt-o s ¡\ .=t' oro(oo.)o.)to(orif o__ @ o o o)(Ðoc\¡l*o)(f)(o(f)(o(o (o lo r.c)s@-(\@-(OO)o- ¡f) Ct¡ JË={L FIl)C\¡c¡)l¡)c)(O(Ot.r)l:- CÐ @ =Ats> r(\(!(Ð$(f)c!r o- .9, o (ú OO(g(O¡-OIf)O@tOC!OO l'-@- $ (O (O lr) F.lO O, @ @ l'- (O O O E OTl)CO(Or(Y)-O).(fC!FO$ s-&$- o ro Jño @;¡l:o, d=j@ .=e 'û(o- Ès o¡ sf l* (\ tO 'r¡e tO l- (Ð (O O (O (o lo¡.r,o o ro_ to_ (o_ @_ rf)- ¡!= rÌ:(O r)- - fo- \ A |-_ cD_: R Få l'*|\l-(o(c|rosorc)@ror@ 5s s giF s þ c{-(OFC!f-O\t${-iif{.s-O (f) (o (f) (o (o \r s s .qf .sf .sl lc\|c?afqc?clc?c?a?cìq - es Els (o(o(o(o(oro(o(0(o(0(o(o(o .¡- OtB o =ll- ËI l^c) ro l.c) r.c) ro r.l) rl) o) EËë a '= ooooooaqaaaa o g¡ lÚ È R :äls )e f5 Ë: -cE c., t L-Ê Ëlu (o (Ð^ Ë'g -(Oeñll-çIr@r@-r 'slp q\oìoìc(fi (oï -@ lo r.c) r.c) r.c) (o L.,' , \ ØË .gli ^otr-Yg o Elz JËE fúl >v ts o ooooooooooooo b àË o_ o- o- o_ o_ o- o_ o_ o- o- o- o_ o_ =o5 OO(O(ÐFIOOCÐC!@O(OO \r F o @ r.r) ¡f) lo o, o, o, (f) @ tt I õE c{ N C{ O) O) @ l- \f (g (Ð O) F N '=Ë>ì JJJ J;J J U' .E 9) '¡J cE o oc> OOOOOOOOTFFF- FFr---FFFSrrÊ øtu.E ooooooooooooo g, c! c! c! c! c! c\¡ c\¡ c\¡ N c\ c{ c\ c\t e ÈE oL E (o +3E o = g! fL<ø)õäjj LL õ I r 6P *Ê$ ¡r -Le- -Ë Er OcJ 'tr õ-4 Ë sËãåËËËËË¡sec ü o õä FN.')iirr.,(o;;;p=Sp ¿ .; o o fit o CL E =(Yt oo Kaz cross examination exhibit (#s2346s0) Lons term debt cost Staff rate base 1 81,102,000 Staff Rule 42, Statements A and B Staff LTD weighted cost % 2 2.43o/o SMK-7, Schedule 1 Staff LTD recommended return S 3 s 1,970,779 Line 1x line 2 Actual LTD cost 4 s 4,479,677 Hope Rule 42, Statement C, page 1 of 1 Staff recommended debt cost below actual (2,508,898) Line 3 - line 4 Lons term debt ¡nterest coveraee - post tax Staff rate base 7 81,102,000 Staff Rule 42, Statements A and B Staff rate of return 2 5.44% SMK-I, Schedule 1 Staff post tax net operating income 3 4,411,949 Line 1x line 2 Actual LTD cost 4 4,479,677 Hope Rule 42, Statement C, page 1 of 1 Post tax LTD interest coverage 5 0.985 Line 3 / line 4 Pre-tax lone term debt coverage Staff rate base 1 81,102,000 Staff Rule 42, Statements A and B Staff rate of return 2 5.44% SMK-I, Schedule 1 Staff post tax net operating income 3 s 4,41L,949 SMK-I, Schedule 5, sheet 1 of 3 Staff FIT-SlT 4 s 2,622,000 SMK-1, Schedule 5, sheet 1 of 4 Staff pre-tax operating income 5 57,033,949 Line 3 + line 4 Actual LTD cost 6 4,479,677 Hope Rule 42, Statement C, page 1 of 1 Actual pre-tax LTD interest coveraBe 7 1.570 Line 5 / line 5 Available for dividends and retention Staff rate base t 81,102,000 Staff Rule 42, Statements A and B Staff rate of return 2 5.44% SMK-L, Schedule 1 Staff post tax net operating income 3 s 4,417,949 SMK-1, Schedule 5, sheet 1 of 3 Actual LTD cost 4 s 4,479,677 Hope Rule 42, Statement C, page L of 1 Available for dividends and retent¡on 5 167,7281 Line 3 - line 4 Return on actual equ¡tv Staff rate base 1 81,102,000 Staff Rule 42, Statements A and B Staff equity weighted cost % 2 2.82% SMK-L, Schedule 1 Staff equity recommended return S 3 s 2,287,076 Line 1 x line 2 Hope Equity 3/31/08 4 s 69,343,000 Staff Rule 42, Statement F, page 2/2, line 7 Staff recommended return on actual equity 5 3.298% Line 4 / line 3 Cash flow Staff rate base 1 81,102,000 Staff Rule 42, Statements A and B Staff equity weighted cost % 2 2.82o/o SMK-L, Schedule 1 Staff equity recommended return S 3 2,287,076 Line 1 x line 2 Staff recommended retention rate 4 30.88% SMK-1, Schedule 5, sheet 2 of 3 Staff recommended retent¡on S 4 s 706,249 Line 3 x line 4 Depreciation cash flow 5 s 6,063,105 Staff Rule 42, Statement A Cash available for construction after dividends 6 6,769,354 Line 4 + l¡ne 5 (internally generated) Average 2009-2010 capital additions 7 tl,7tO,OO1 SMK-I, Schedule 5, sheet 3 of 3 Percent of construction internally generated 8 57.81% Line 6/line7 E'drr GÃ'sF c, dÉal* .D I õB E e-xlq _ _ ¡^l at * ..ËÊ '; I + cr. å å (b.b,b.b .b ¿"lP o ã ss õ9. ÊI t Ãttsd6àE < < õ à à õõEõ ìõt9 f. sa. :* ËöE ð l<õ;$ å Ë äööËöõö ì s< -t9zõ b -\S jâelÊ. Bo$ o.;oÞ'ãÈlE s Fg s6 SS nS.ri "9! o oG5(D oro¡oo * l4 (oNr()óoNj Þ àí ø-' oo@oöoNo Fâ ìQ< cr @(ocr ì (o@ (oôt o o oö o N (:, (oo Lrr 1Tf1:r1 îÍ Ê) 1'oooooo l¡ -ú .1t 1¡ 'tt -t¡oo :g mmmmmm mm I -N Dominion Hope Attacl'ment 1 Case No.05-0304-G427 Cost of Seruice Line Total No. Descripiion $000 Column (1) (2) 1 Return 9,360 2 O&M Expenses 26,592 3 DD&A 7,365 4 Other Taxes 6,870 5 Federal lncome Taxes 3J26 6 State lncome Taxes 737 7 TotalCOS Before Additional Taxes (fines 1 through 5) 54,O49 I Less: Going Level Revenues 50,286 9 Deficiency Before Additional B&O and Uncollectibles 3,763 10 Additional B&O Taxes 76 11 AdditionalUncollectibles 161 12 Total lncrease Required 4,O00tì -g t- ¡-. ooÉNco \o bl e o\ o\ o\ \o\o\oN *J v) æ - c\oI \o^ 4rl-Ø o o t-r Næ æ grr$P Ë r¡ Câ F- F- õ¡ ôl \o 7tniP M oo æ =ae4 \ô \o HËãpä t¡l : ;n/ ¡- c- sí' hÕ\Õæ o\ o\ co co õì \o 6 Fvi¿; .tf, æ^ ro^ \o^ -1: ã*OV (A \ lv H s st ÊÉF-O\ ^