20060302-3032 Issued by FERC OSEC 03/02/2006 in Docket#: RP04-274-000 114 FERC ¶63,031 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Kern River Gas Transmission Company Docket No. RP04 -274 -000 INITIAL DECISION (Issued March 2, 2006) APPEARANCES Jeffrey G. Disciullo, David Shaffer, Richard St apler, and Michael J. Thompson for Kern River Gas Transmission Company (“Kern River” or “company”) . Jennifer Spina and Mark Sundback for BP Energy Company (“BP”) . Matthew Binette and Paul F. Forshay for Calpine Energy Services, LP (“Calpine”) . Kevin J. Lipson and Christopher Schindler for Edison Mission Energy, LLC (“Edison Mission”) . Bruce Bedwell and Kenneth W. Irvin for El Paso Merchant Energy, L.P (“El Paso”) . Robert Fallon for High Desert Power Trust (“High Desert”) . Timothy Bolden, Kelly A. Daly , and Lucy Holmes Plovnick for Pinnacle West Capital Corp oration (“Pinnacle West ”) . David S. Anderson for Questar Gas Company (“Questar”) . Katherine B. Edwards and John Paul Floom for the Rolled -In -Customer Group (“RCG”) . Alana Steele for Southern Calif ornia Generation Coalition (“SCGC”) . Thomas J. Burgess and Arnold H. Meltz for the Federal Energy Regulatory Commission (“Staff” ). Charlotte J. Hardnett, Presiding Administrative Law Judge 20060302-3032 Issued by FERC OSEC 03/02/2006 in Docket#: RP04-274-000 Docket No. RP04 -274 -000 ii TABLE OF CONTENTS INTR ODUCTION ......................................................................................................1 PROCEDURAL HISTORY ............................................................................1 BACKGROUND............ ................................................... ...............................2 WITNESSES AND THEIR TESTIMONY................................ ...............................4 ISSUES/POSITIONS/CONCLUSIONS/DISCUSSION................................... ........86 I. Cost -of -Service/Ratemaking Methodology ........................................86 A. Levelized Versus Traditional ...................................................86 II. Cost -of -Service Elements ................................................ ...................90 A. Cost of Capital............................................................................90 1. Rate of return on equity (“ROE”) .................................91 2. Debt C ost .................................................... .................101 3. Capital Structure .........................................................106 B. Rate Base ..............................................................................112 C. Depreciation .................................................. ........................118 D. O&M and A&G Expenses ....................................................129 E. Income Taxes ........................................................................133 III. Cost Allocation and Rate Design ............................. .......................136 a. Cost Allocation ...................... .. ..................................................136 b. Rate Design .......................................................................... .. ...141 FURTHER FINDINGS AND CONCLUSIONS ... ............................................. ...157 ORDER ..................................................................................................................158 20060302-3032 Issued by FERC OSEC 03/02/2006 in Docket#: RP04-274-000 Docket N o. RP04 -274 -000 1 INTRODUCTION PROCEDURAL HISTORY 1. On April 30, 2004, Kern River Gas Transmissi on Company submitted a general rate change filing in Docket No. RP04 -274 -000, pursuant to Section 4 of the Natural Gas Act, 15 U.S.C. §717c (“Section 4”) and in ac cordance with its obligation under Article VI of the Stipulation and Agreement dated March 31 , 1999, and approved by the Federal Energy Regulatory Commission (“Commission” or “FERC”) in Docket No. RP99 -274 - 000. 1 Kern River’s filing utilized a test period consisting of a base period of the twelve months ending January 31, 2004, as adjusted for kno wn and measurable changes occurring through October 31, 2004. Kern River submitted two sets of tariff sheets, presenting new rates proposed to become effective June 1, 2004, and January 1, 2005, to reflect the 366 -day leap year in 2004 and the 365 -day yea rs thereafter, respectively. 2. By order dated May 28, 2004, the Commission accepted and suspended Kern River’s filing, subject to refund and other conditions, and established the instant evidentiary hearing proceeding, designating the case as a Track III proceeding. 2 Chief Administrative Law Judge Curtis L. Wagner, Jr. (“Chief Judge”) , subsequently designated Administrative Law Judge Isaac D. Benkin as the presiding judge for this proceeding. An initial prehearing conference was held on June 8, 2004, at which time a procedural schedule was adopted. 3. On September 28 and 29, 2004, an informal conference of the P articipants was convened to explore the possibility of settlement. The settlement discussions were not successful. 4. On October 1, 2004, Kern River moved to place its proposed new rates into effect, subject to refund, at the end of the suspension period on November 1, 2004. The Commission accepted Kern River’s filing, to be effective as proposed, by unpublished letter order dated October 27, 2004. 5. Staff, Intervenors and Kern River then filed prepared direct, answering, cross - answering and rebuttal testimony on prescribed dates from early December 2004 to mid - March 2005 and conducted discovery on each round of such filed testimony. Discovery conclude d on April 8, 2005. 1 Kern River Gas Transmission Co. , 88 FERC ¶ 61,12 8, order on reh’g , 88 FERC ¶ 61, 201, reh’g denied, 89 FERC ¶ 61,144 ( 1988 ). 2Kern River Gas Transmission Co. , 107 FERC ¶ 61,215, order on reh’g , 1 09 FERC ¶ 61,060 (2004). 20060302-3032 Issued by FERC OSEC 03/02/2006 in Docket#: RP04-274-000 Docket N o. RP04 -274 -000 2 6. During the course of these activities, by order dated December 20, 2004, the Chief Judge substituted Administrative Law Judge Bobbie J. McCartney for Administrative Law Judge Benkin as the presiding judge and extended the hearing and other Track III procedural dates. At a prehearing conference before Judge McCartney on January 11, 2005, a new procedural schedule was adopted. Another informal settlement conference thereafter was convened, but again the negotiations did not result in a s ettlement. 7. By order dated April 21, 2005, the Chie f Judge, at the request of the P articipants, convened a settlement conference with Administrative Law Judge William J. Cowan acting as a settlement judge. The same order substituted Administrative Law Jud ge Charlotte J. Hardnett for Judge McCartney as the presiding judge for this proceeding. A subsequent order of the Chief Judge, dated May 24, 2005, further modified the hearing date and other elements of the Track III procedural schedule. 8. The P articipa nts’ negotiations facilitated by the Settlement Judge ultimately proved unsuccessful and the settlement judge procedure was formally ended by the Chief Judge’s order dated June 22, 2005. On the same date, a prehearing conference was convened before The Un dersigned to establish arrangements for the hearing, including dates for certain procedural filings to be made prior to the start of the evidentiary proceeding. 9. The hearing commenced on August 17, 2005, and concluded on August 26, 2005. The evidentiary re cord incl udes testimony from twenty -four witnesses, eight volumes of transcripts of the evidentiary hearing, approximate ly 435 exhibits (including the Participants’ pre -filed written testimony and exhibits) and eight items by reference. 10. By order dated N ovember 8, 2005, the Chief Judge extended the initial decision date from January 5, 2006 to February 3, 2006, due to the complexity of the issues presented and amou nt of evidence to be considered. By order dated January 25, 2006, the Acting Chief Judge, W illiam Cowan, extended the initial decision date again from February 3, 2005, to March 3, 2005, for the same reasons. 11. All previous Kern River rate filings were settled before Commission decision on them. 3 BACKGROUND 12. The Kern River natural gas pipeline system extends about 900 miles from Wyoming receipt delivery points , through Utah and Nevada , to the San Joaquin Valley near Bakersfield, Kern County, California. The pipeline was originally constructed 3 See Kern River Gas Transmission Co. , 70 FERC ¶ 61,072 (1995) and Kern River Gas Transmission Co. , 87 FERC ¶ 61,124 (2000). 20060302-3032 Issued by FERC OSEC 03/02/2006 in Docket#: RP04-274-000 Docket N o. RP04 -274 -000 3 pursuant to an optional certificate of public conven ience and necessity issued on January 24, 1990, to provide up to 700,000 Mcf/d of year -round firm transportation services. 4 The pipeline was built to transport 700 MMcf of gas per day on a firm basis. Kern River is a “transportation only” pipeline; it p rovides no gathering or storage services. Kern River began service in 1992. 5 13. On November 15, 2000, Kern River filed an application for authority to construct and operate a compression -only expansion. This expansion of the pipeline is known as the “20 02 Expansion Project.” 6 On March 15, 2001, due to the need for natural gas in California in 2000 -20 01 , Kern River filed an application for an expedited construction schedule that would put in place most of the facilities proposed in the 2002 Expansion Pro ject. This project was known as th e California Action Project