DELMARVA POWER & LIGHT COMPANY / APPLICATION FOR AN INCREASE IN NATURAL GAS BASE RATES /' TESTIMONY AND SCHEDULES (BOOK 2 OF 3) BEFORE THE DEL A WARE PUBLIC SERVICE COMMISSION I August 3172006 1 DELMARV A POWER & LIGHT COMPANY 2 TESTIMONY OF MARK BROWNING 3 BEFORE THE DELAWARE PUBLIC SERVICE COMMISSION 4 CONCERNING AN INCREASE IN GAS BASE RATES 5 DOCKET NO. 06- 6 7 1. Q: Please state your name and position. and business address. 8 A: My name is Mark Browning. I am Director of Rates and Technical 9 Services, Regulatory Affairs, for Pepco Holdings Inc. ("PHI"). My business 10 address is 401 Eagle Run Road, Newark, DE 19714. I am testifying on behalf of 11 Delmarva Power & Light Company ("Delmarva" or "the Company"). A 12 statement of my occupational and educational history and qualifications is 13 appended to this testimony as Schedule MEB-1. 14 2. Q: What are your responsibilties in your role as Director of Rates and 15 Technical Services. Rel!ulatorv Affairs? 16 A: I am responsible for overseeing the Company's cost of service, rate design 17 and revenue requirements functions relating to PHI's three regulated utility 18 subsidiaries, including Delmara Power & Light Company ("Delmarva" or "the 19 Company"). 20 3. Q: Have yOU recentlv testifed before the Delaware Public Service Commission? 21 A: Yes, most recently, I fied testimony before the Delaware Public Service 22 Commission in the Company's SOS proceeding in Docket No. 04-391. I have 23 also presented testimony before the Maryland Public Service Commission, the 24 District of Columbia Public Service Commission, the Federal Energy Regulatory 1 1 Commission, and the Surface Transportation Board of the United States 2 Department of Transportation. 3 4. Q: What is the purpose ofvour testimony? 4 A: I am the overall regulatory policy witness and I provide support for the 5 Company's Application for an increase in Gas Base Rates. The costs of providing 6 safe and reliable service to the Company's gas customers has increased 7 considerably, and this requested rate increase is necessary in order to provide 8 Delmara with full and timely recovery of these costs. I also present the 9 Company's proposal for a revenue stabilization mechanism, which has benefits 10 for the Company and for customers. As part of my testimony I wil provide an 11 overview of the filing by Delmarva and I wil briefly summarize the testimony of 12 the Company's other witnesses. 13 5. Q: Please provide an overview of what the Company is reQuestinl!. 14 A: The Company is requesting approval of a proposed Increase of 15 $14,967,412 in its gas delivery base rates or 6.62% of total revenue. As stated in 16 this Application, the Company is requesting a Return on Equity (ROE) of 17 11.00%, which results in an overall rate of return of 8.08%. As explained by Dr. 18 Morin, the Company's requested ROE is based on the Commission approving a 19 Bill Stabilization Adjustment (BSA) mechanism, which has the effect of lowering 20 somewhat the Company's risk profie. Without the approval of the BSA, the 21 Company's proposed ROE increases to 11.25%, and the Company's revenue 22 requirement would increase approximately $500,000. 2 1 The Company, coincident with this filing, also filed its annual Gas Cost 2 Rate (GCR) adjustment and Environmental Surcharge Rider (ESR). The 3 combined effect of the three filings, if approved by the Commission and fully 4 implemented, will be a very modest overall reduction to rate levels. However, 5 since the GCR and ESR charges will go into effect on November 1,2006, while 6 the full impact of the base rate request wil not occur until the spring of 2007, on 7 November 1, 2006 a typical residential space heating customer using 120 ccf 8 during the heating season will experience an overall rate decrease of 6.2% or a 9 reduction of$l1.73. 10 6. Q: Please summarize the Company's earninl!s condition in the test period for 11 the l!as business. 12 A: The Company developed a fully historic test year and test period of the 13 twelve months ended March 2006. It is the most recent historical period available 14 and incorporates the most recent winter period. This test period, with the 15 adjustments proposed, represents a reasonable basis for establishing the 16 Company's revenue requirements. As shown in the Company's fiing, for the test 17 period as adjusted, the Company is earning a Rate of Return (ROR) of only 18 4.35%. The information is summarized in Company Witness VonSteuben's 19 testimony, as Schedule WMV-23. 20 7. Q: When did the Company last fie for a l!as base rate increase? 21 A: The Company last requested an increase in gas base rates in 2003 in 22 Docket No. 03-127. The Commission approved Order No. 6327 in Docket No. 23 03-127 which approved a Settlement Agreement reached by the paries involved 3 1 in the case which provided for an anual gas base rate increase of $7.75 milion. 2 Rates went into effect December 10, 2003. The Settlement Agreement specified 3 an ROE of 10.5%. It was quickly apparent to the Company, however, that the 4 increase was insufficient, as the first historical test year after rates became 5 effective showed that the Company was only able to achieve a 7.77% ROE, based 6 on the Company's Rate of Return submittal with the Commission for 2004. 7 8. Q: Please explain the structure of this tilinl!. 8 A: Book 1 consists of the Application, the Minimum Filing Requirements, 9 and Tariff Modifications. Book 2 is comprised of the testimony of several 10 witnesses that support the Company's request for an increase in gas base rates. 11 Book 3 is comprised of work-papers to support the Company's adjustments and 12 Rate Design. 13 9. Q: Please describe the testimony that wil be presented in support of this 14 Application. 15 A: There are eight other witnesses presenting testimony in support of the 16 Company's Application. They are as follows: 17 . Mr. Charles L. Driggs, Manager of Gas Operations and Planning, 18 discusses the overall Gas business, and in particular the cost increases that 19 result from the need to provide safe and reliable service. 20 · Ms. Kathleen A. White is Assistant Controller for PHI and its operating 21 companies. Ms. White sponsors the books and record of the Company. 22 . Mr. W. Michael V onSteuben, Manager of Revenue Requirements, 23 discusses the development of the proposed revenue requirement. 4 1 . Mr. Joseph F. Janocha, Regulatory Affairs Manager, discusses the 2 Company's rate design initiatives, and the proposed rate increase that is 3 applicable to the various customer classes. He also sponsors the 4 Company's tariff rates and certain miscellaneous proposed tariff changes. 5 · Dr. Kemm C. Farney, Regulatory Affairs Lead, discusses the details of the 6 Company's weather normalization, the effects of rising prices on gas sales 7 volumes, and calculations of the design day requirements for certain 8 customer classes. 9 . Dr. Roger A. Morin is a principal at Utility Research International as well 10 as a Professor of Finance at the College of Business at Georgia State 11 University and Professor of Finance for Regulated Industry at the Center 12 for the Study of Regulated Industry at Georgia State University. Dr. 13 Morin provides testimony on capital structure as well as the appropriate 14 fair rate of return including the cost of equity that the Commission should 15 allow the Company an opportunity to earn. 16 · Dr. John H. Chamberlin of Quantec, LLC., discusses the Company's 17 proposed Bil Stabilization Adjustment. 18 . Mr. Paul M. Normand, a Principal with Management Applications 19 Consulting, Inc., supports the Company's Cost of Service study. 20 10. Q: What are the reasons that the Company is reQuestinl! this increase? 21 A: The costs of providing safe and reliable service have increased sharply 22 over the last few years. Operating expenses have increased from $37.2 million to 23 $44.1 milion, or 19%, since the Company's last base rate filing. Mr. Driggs 5 1 discusses the increased costs, including additional safety requirements, which are 2 causing this increase. In addition, the gas rate base has increased from $216.3 3 millon to $237.7 millon, or 10%. Adjusting for the rate increase of $7.75 4 millon allowed in the last case, revenues have been essentially flat, so that these 5 cost increases are not mitigated by any increase in revenues. 6 The current level of rates must be increased to reflect the current level of 7 costs that the Company is incurrng to provide service to its gas customers. The 8 Company intends to continue to meet its obligation to provide safe and reliable 9 service to its customers, and it needs to fully recover the costs required to do so in 10 a timely maner. 11 11. Q:Whv is the Company reQuestinl! a chanl!e in ROE from the last authorized 12 ROE of 10.5% to 11.00%? 13 A: The ROE that the Company requests in this Application is discussed in 14 detail in Dr. Morin's testimony. The last authorized ROE of 10.5%, which was 15 determined as par of an overall settlement, is not an accurate reflection of the true 16 cost of equity capital to the Company.