COMMISSION WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) Docket No. UG-971071 Complainant, ) Volume 3 vs. ) Pages 34 - 68 THE WASHINGTON WATER POWER ) COMPANY, ) Respondent. ) ----------------------------- ) A hearing in the above matter was held on December 22, 1997 at 1:40 p.m. at 1300 South Evergreen Park Drive Southwest, Olympia, Washington, before Chairwoman ANNE LEVINSON, Commissioners RICHARD HEMSTAD, WILLIAM R. GILLIS and Administrative Law Judge MARJORIE R. SCHAER. The parties were present as follows: WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by ROBERT CEDARBAUM, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504. THE WASHINGTON WATER POWER COMPANY, by DAVID MEYER, Attorney at Law, 1200 Washington Trust Building, Spokane, Washington 97203. NORTHWEST INDUSTRIAL GAS USERS and NORTHWEST ALLOYS, by EDWARD A. FINKLEA, Attorney at Law, Suite 1200 One Main Place, 101 Southwest Main Street, Portland, Oregon 97204. FOR THE PUBLIC, SIMON FFITCH, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. Cheryl Macdonald, Court Reporter I N D E X PANEL EXAM 40 EXHIBITS MARKED ADMITTED 1 - 32 37 33 38 39 34 38 39 P R O C E E D I N G S JUDGE SCHAER: Let's be on the record. The hearing will come to order. This hearing was set by a notice of hearing dated December 11, 1997. Today's date is December 22nd, 1997. This is a hearing before the Washington Utilities and Transportation Commission for the purpose of taking testimony on a settlement proposal between the Washington Water Power Company, Commission staff, public counsel and intervenors the Northwest Industrial Gas Users and Northwest Alloys, Incorporated in docket No. UG-971071 which is a request for a general increase in natural gas rates by the Washington Water Power Company. My name is Marjorie Schaer and I'm the administrative law judge assigned to these proceedings. Sitting to my right are Chairwoman Anne Levinson, Commissioner Dick Hemstad and Commissioner Bill Gillis. We are in the Commission hearing room in Olympia, Washington. Let's start by taking appearances starting with the company, please, Mr. Meyer. MR. MEYER: Thank you. Appearing on behalf of Water Power, David Meyer. JUDGE SCHAER: For Commission staff. MR. CEDARBAUM: Representing Commission staff, Robert Cedarbaum, assistant attorney general. JUDGE SCHAER: For public counsel. MR. FFITCH: Representing public counsel, Simon ffitch, assistant attorney general. JUDGE SCHAER: For the intervenors. MR. FINKLEA: For intervenors Northwest Alloys and the Northwest Industrial Gas Users. My name is Ed Finklea. I'm counsel for those intervenors with the firm Energy Advocates LLP in Portland, Oregon. JUDGE SCHAER: At the pre-hearing conference in this matter Exhibits 1 through 32 were marked for identification. Do the parties wish to have those admitted at this time? MR. CEDARBAUM: Yes, we do. JUDGE SCHAER: And by stipulation of counsel, I will admit Exhibits 1 through 32 into this proceeding. (Admitted Exhibits 1 - 32.) MR. FFITCH: Your Honor, we by previous discussion also have the ratepayer letters prepared as an exhibit to be offered at a convenient time. JUDGE SCHAER: Okay. I will mark those for identification as Exhibit 33 and you can distribute those at this time if you would, please. (Marked Exhibit 33.) MR. CEDARBAUM: Your Honor, while Mr. ffitch is doing that I now have copies of the stipulation and attachments. Should I distribute those at the same time? JUDGE SCHAER: Why don't you go ahead and distribute those at the same time and we'll mark that for identification as Exhibit 34. (Marked Exhibit 34.) MR. MEYER: And while all of that is being done, by way of further housekeeping, as indicated before we went on the record, there is one very minor numbers revision to attachment A to the settlement. What's being distributed actually has that correction made to it by way of a revised attachment A page, but for those who are still working with the old version of attachment A let me just read into the record the one numbers change. Shown in attachment A, which is a summary of present rates and proposed rates for each schedule -- it's in the nature of a summary -- for schedule 121, which is the large general service schedule, what had been attached to the settlement package was a rate for consumption under the column rates effective 1-1-98. Let me make sure everyone is there first that needs to be there. This is attachment A to the original settlement, and it's page 2 of 2 and it's the column entitled Rates Effective 1-1-98 and the category is halfway down the page large general service schedule 121. For the consumption category over 10,000 therms we did show a rate of 29.700 cents per therm. That number has been revised to read 28.910 cents per therm. Again, the change is from 29.7 to 28.910 cents per therm. As far as I know all the other numbers remain the same. JUDGE SCHAER: Thank you. Does everyone have that change? Are there any objections to entry of Exhibits 33 or 34? They are admitted. (Admitted Exhibits 33 and 34.) JUDGE SCHAER: At this point would you please call the witnesses who will describe the settlement. MR. MEYER: Thank you. Appearing on behalf of the company we have two members of a five member panel. Our two members are Mr. Tom Dukich and Mr. Brian Hirschkorn. MR. CEDARBAUM: Commission staff witness is Merton Lott. Also in the hearing room, though, is Henry McIntosh and Kenneth Elgin and they're available for any questions which Mr. Lott may need to defer to them. JUDGE SCHAER: All right. MR. FFITCH: Public counsel's witness is Jim Lazar. JUDGE SCHAER: Thank you. MR. FINKLEA: Northwest Alloys and Northwest Industrial Gas Users' witness is Don Schoenbeck. JUDGE SCHAER: Thank you. Gentlemen, would you please raise your right-hand. Whereupon, TOM DUKICH. BRIAN HIRSCHKORN, JIM LAZAR, MERTON LOTT and DON SCHOENBECK, having been first duly sworn, were called as witnesses herein and were examined and testified as follows: JUDGE SCHAER: Your witnesses are sworn. Please proceed. MR. MEYER: Thank you. We had no prepared remarks to make. We did, however, discuss among the parties a manner of responding to the ten or so items of your bench request, and we thought with your permission we would like to proceed directly to respond to those on the record, and our view is that you would tender the question and we would respond either through one or more witnesses. JUDGE SCHAER: So you would like me to go through those questions at this time? MR. MEYER: Would you, please. JUDGE SCHAER: Certainly. First two questions were identified as being an area of cost of capital. First question was, is it the intent of the parties that either the return on equity or the rate of return agreed to in the settlement would be used in any other future proceedings including PGA filings or other tariff revisions that might be filed during the rate freeze period. MR. LOTT: This is Merton Lott of staff. The answer is simply no. This rate of return is simply for purposes of this settlement only. JUDGE SCHAER: And the second question in that area was why has the company reduced its short-term debt to 1.78 percent of the capital structure from the 6 percent it was previously; and, as a second part of that question, what are the company's plans with respect to its use of short-term debt in the future. MR. DUKICH: Tom Dukich from Water Power. The short-term percentage at the end of '96 was about 1.9 percent and then grew to the end of '97 or end of '96 to the 5.9 or 6 percent number, and then that short-term debt is rolled over into a longer term financing, which when that's normally done which brings it back down to about 1.8 percent, and that would be the level that the company would intend to keep it at for the average of the long-term, and that's what it was prior to that refinancing. JUDGE SCHAER: Third question is an area identified as rate base, and states that Exhibit 10, which has now been admitted, is a chart showing rate base on a per customer basis from 1990 through 1996. It shows that rate base per customer has increased in that period. Can you explain the reasons for that increase? MR. DUKICH: Yeah. Again, Tom Dukich from Water Power. The company's number of gas customers grew approximately 50 percent from 1990 to 1996, and with the addition of those new customers plant is being added at the new plant level, and if you compare that to the embedded depreciated cost of plant it causes the average to go up, and that is further outlined in page 3 of Mr. Fukai's testimony as well. JUDGE SCHAER: Now, that raises a question. Exhibit 10 had been identified as being from Ms. Racicot, and I understood that you were going to have Mr. Fukai adopt that testimony, but I didn't see you offer the exhibit that would have done that. Can you agree to have that included in the record in this proceeding? MR. MEYER: Well, we thought about it and decided that we didn't think it to be necessary, but we certainly have no objection to doing that. I think the parties were prepared to stipulate in the record the testimony as previously offered by Ms. Racicot, but if you would prefer we would gladly introduce as well the supplemental testimony of Mr. Fukai. JUDGE SCHAER: I'm not sure we need to do that. I just think it might be clear s if we referred to this as Ms. Racicot's testimony given this. MR. DUKICH: I can correct my answer and say it's Ms. Racicot's testimony on page 3. JUDGE SCHAER: Thank you. That way we can find it. The next area, which is identified as administrative and general expenses, Exhibit 11 shows that in 1996 that administrative and general expenses increased more sharply than they had in prior years, and that the increase is not in proportion to increases in the other types of expenses shown on the graph. Can you explain what caused this increase in administrative and general expenses? MR. DUKICH: Yeah, again Tom Dukich from Water Power. Two things. There was a reallocation of costs done between '92 and '93, and as a result of that some costs, A and G costs, went from -- as a result of a new jurisdictional allocation went from the gas business to electric, and that causes the proportion to be different after 1992. In terms of the trend, in terms of the increase in cost, two things are going on there. During '95 the company was involved in merger activities. A lot of the A and G costs were assigned to merger, our work orders, which were subsequently written up to the company so that caused the number to be a little lower. In '96 the numbers were a little higher because the pension needed to be refunded, and I think the pension fund was funded for approximately $400,000. So '95 is a little lower, '96 is up a little. The trend would be pretty even otherwise, and the proportions are explained by the prior reallocation process between services. JUDGE SCHAER: Looking at jurisdictional allocations, the fourth question we had sent was on page 5 of Exhibit 22 witness Falkner discusses the jurisdictional allocation procedures and mentions that Commission staff performed a preliminary analysis of the new methodology and found it to be reasonable. Was this analysis performed in a docketed proceeding? MR. LOTT: This is Merton again. The answer to that is no. It was not in the formal docket. There was a letter in -- staff reviewed that in 1993, and there was a letter dated October 12, 1993 from staff concerning the reasonableness and the reservations that staff was making at that time. JUDGE SCHAER: Has the methodology been reviewed or audited by Commission staff since that time? MR. LOTT: In this proceeding staff did review the results and the methodology for allocations. Staff makes no -- in this proceeding that was done. Staff found no exceptions to the methodology. While we did have some problems with the data used, the company has agreed to work informally with staff in trying to update the data going forward. As far as the revenue requirements in this case go, there is no -- there is nothing in the settlement which adopts or accepts the allocations specifically or the results of those allocations specifically. JUDGE SCHAER: Will there be additional reports of the nature of the earlier report made to the Commission showing the outcome of that updating of data and what your work there is doing? MR. LOTT: The company on a monthly basis sends us monthly reports. Those monthly reports are -- utilizes allocation method. On an annual basis the company sends us semi-annual reports. Those semi-annual reports, which are restated results of operation, also uses allocation methods. Staff gets those results, including staff's findings to those results, prints them out for the Commission's review, and the allocation, if there was a problem with the allocation method we will probably make adjustments in those semi-annual reports. So to that extent the answer I guess is yes. But it would be in relationship to the semi-annual reports, again, not directly related to this settlement. Just be a matter of the staff's review of the semi-annual reports. JUDGE SCHAER: Then you make what you call findings if there's something that staff finds inappropriate in those reports. MR. LOTT: Right. If you look at the semi-annual reports as we send them to the commissioners there's a company restatement and then there's a staff restatement below that, and if we do find differences between what we put and what the company originally submitted, we show an adjustment. JUDGE SCHAER: Looking at costs of service and rate design, bench request asked for a document which has been provided and then question 7 was, "By requesting approval of the stipulation are the parties requesting a revenue shift of the full amount of the lost margin incurred as a result of the special contract customers currently served under schedule 48?" MR. LOTT: Again, the answer is no. The settlement does not address the revenue shift directly. Staff -- staff, however, due to the order from the Commission in the prior docket, did review both contracts, all three contracts underneath the schedule 148, and incorporated that into our positions that we took in the case. MR. LAZAR: Jim Lazar for public counsel. The answer is no. MR. SCHOENBECK: This is Don Schoenbeck on behalf of the Northwest Industrial Gas Users and Northwest Alloys. I would like to echo the same response as Mr. Lazar. It was not an issue that was directly addressed to offer the settlement, so it would be an open issue for the next proceeding. MR. LOTT: If that wasn't clear that was staff's position, but staff did review them because of the order in the previous case. JUDGE SCHAER: All right. Company have anything to add? MR. DUKICH: No. JUDGE SCHAER: Next question in the bench request was, "The stipulation states that residential customers would incur a rate increase for gas service of approximately 9 percent. Does the company intend to conduct activities related to customer education and notification beyond what is currently required to mitigate the rate shock to these customers?" MR. HIRSCHKORN: This is Brian Hirschkorn with the company. The answer is yes. If the Commission approves the settlement rates the company will provide additional information to customers in the form of a separate bill insert, probably in their January bills. Billing insert will provide general information on the increase that's approved as well as the average monthly increase residential customers can expect. I might add, when the company filed the case we had an educational campaign for customers, and provided information in newspapers, radio advertising as well as television advertising, to try and inform customers that gas rates are going to go up this winter. And we plan to take that a step further and provide information on the actual increase that is approved. JUDGE SCHAER: Question No. 9 on the bench request was, "Would approval of the stipulation restore the rate design for schedules 111 and 121 which was in place prior to the Commission's third supplemental order in docket No. UG-901459?" MR. HIRSCHKORN: This is Brian Hirschkorn again on behalf of company. The docket number that was referenced was the company's rate design cost of service filing in 1990 which the Commission approved the rates for effective July 1, 1992. As part of that order we have three sales schedules, firm sales schedule, 101, 111 and 121. Prior to the Commission's order in that docket there was a clear transition for customers in terms of sales schedules. Based on their usage and their load factor it was obvious which schedule they belonged under. As a result of that rate case the rates for the schedules went out of alignment, so to speak, and the break even point between schedules 111 and 121 went from 10,000 therms a month to less than a thousand therms a month. As a result of the rate design that's been proposed in the settlement, the rates for schedules 111 and 121 are realigned back to that -- to their structure prior to that order and will again provide a clearer transition in terms of what schedules customers belong under. JUDGE SCHAER: And the final question that was asked on the bench request was No. 10: "The company originally proposed a three-tier declining block rate structure for transportation service schedule 146 in place of the present flat rate for all usage. The stipulation proposes a two-block rate structure to become effective June 1, 1998. Do the parties anticipate lost margins associated with the shifting of customers between sales and transportation schedules with the stipulation's proposed rated structure?" MR. HIRSCHKORN: This is Brian Hirschkorn again on behalf of the company. We presently have about 18 customers served under sales schedules that qualify for transportation service, both under present rates and those proposed as part of the settlement. If all of these customers switched to transportation service, the company could potentially lose approximately $77,000 a year in margin. Even though this is not an insignificant amount, we wouldn't expect to lose this amount of margin immediately. Some of these customers may not switch to transportation and those that do will probably switch over a period of years. JUDGE SCHAER: All right. MR. SCHOENBECK: Excuse me. This is Don Schoenbeck again. I would just like to add to make it clear that there's no different incentive from the recommended settlement rate design in this case. That is, the 18 customers that Brian was referring to that could switch to transportation already have had that opportunity and the economics have not changed because of the new two block rate design for schedule 146. JUDGE SCHAER: Anyone else wish to speak to that? Commissioners, did you have any questions? COMMISSIONER GILLIS: When do you expect the next PGA filing to be? MR. HIRSCHKORN: This is Brian Hirschkorn with the company. We expect to file a PGA filing in January, and we are anticipating no net rate change to customers as a result of that filing. There will be some changes for transportation customers and most of that is due to pipeline rate changes as well as if those customers have switched from sales service during the PGA time period. In other words, if there are some gas costs changes that those transportation customers need to pick up, they will see that impact in this filing, but as far as firm sales customers we expect no net change in the rates. MR. LAZAR: Jim Lazar for public counsel. The prospect of a 9 plus percent general rate increase and a significant tracker increase concerned us a great deal as we entered into the settlement discussions, and we spent quite a bit of time going over the company's gas costs and supporting documentation for the statement that Mr. Hirschkorn just made. Just so you kind of generally understand the package, the tracker will consist, as I understand it and expect, of a fairly significant decrease in the demand charge -- that is, the pipeline transportation component of gas costs resulting from a pipeline rate settlement and better marketing of capacity by the company -- and an increase of about equal magnitude in the commodity cost of gas reflecting the fact that gas markets are higher than they were. It is by happenstance that they add up to zero rather than -- and if you follow the gas markets and are aware that gas prices are higher than they were, that concerned us, but fortunately there is a decrease on the pipeline side that seems to offset it. If the tracker proved to be significantly different than what was described we would be very concerned. COMMISSIONER GILLIS: So you're in agreement with the company it's a no net impact? MR. LAZAR: If the tracker looks like all the documentation that we saw, as we saw the settlement I expect it to be zero. COMMISSIONER GILLIS: Maybe continuing with you, Mr. Lazar, first I wanted to ask a little bit more about the special contract handling. Does the stipulation imply anything about the cost treatment of special contracts that might be incurred during the period of rate freeze as proposed on the stipulation? MR. LAZAR: No. It allows the -- the stipulation by its language would allow the company to file additional special contracts that is silent on their true treatment of those contracts for ratemaking purposes in any costed lost margin or found margin that might result. COMMISSIONER GILLIS: Where would we expect that to be taken up and when? MR. LAZAR: We have a two year hold-out period, so presumably it would be either taken up at the time the special contract was filed in a proceeding where the special contract was before the Commission for approval or, as has often been the case, contracts have been approved without approval of the ratemaking treatment in which case I would expect that to be taken up in the next general rate proceeding. MR. LOTT: Since you asked that generally, that was staff's position on this, too, is that there's nothing in this settlement that tells you whether any party would accept a revenue shift from this contract. COMMISSIONER GILLIS: I don't have anything else at the moment. COMMISSIONER HEMSTAD: Those questions and answers and the responses to the bench requests have answered my questions. JUDGE SCHAER: Do you have any questions? CHAIRWOMAN LEVINSON: Only a general question on the issue of unbundled costs and future analysis and when the Commission might look forward to some opportunity for further review. Is there a schedule laid out in that regard? MR. LOTT: I do not believe we had a schedule laid out. It was one of my hopes that the company may participate -- and I suppose this is up to them -- in the first portion of the Puget Sound Energy discussion so that they don't just go out and try to renegotiate the principles of the unbundling cost service studies separate from Puget Sound Energy. We would be doing the same thing with a similar type of company, but that really wasn't decided in the proceeding, I mean our negotiations, only that we would sit down with them and go through that process. MR. DUKICH: Tom Dukich from the company. We as part -- in the settlement we assumed that that would be part of what we would do would be to participate in whatever scheduled events that there are for the Puget discussions, and so we will participate in that, and again, in alignment with Mr. Lott there is no reason for us to reinvent the wheel when it comes to those discussions in terms of cost unbundling. The settlement doesn't imply any particular filing or filing date, however, but it does start the discussion going. CHAIRWOMAN LEVINSON: That's all I have. JUDGE SCHAER: I had a few more questions that were not in the bench requests. On page 1 of the stipulation under the heading Increase in Revenue Requirement, the parties agree to a revenue requirement increase of $5 million, and I believe this has been pretty much handled by the response to Commissioner Gillis's question, but are the parties requesting a revenue shift here of the special contract costs that are discussed in your testimony, the contract customers currently served under schedule 48? MR. LOTT: I think we've answered this before, but the settlement does not describe any revenue shift, does not agree to any revenue shift in this proceeding, I mean in this settlement. MR. LAZAR: Jim Lazar for public counsel. We consider the lost margins due to the special contracts to be, if you will, fair game in the future. MR. DUKICH: I think it's also worth noting that the lost margins from the Kaiser contract are $840,000, so the magnitude is within the bound of the, in quotes, decrease that the company accepted as part of the settlement. If you compare the 7.9 million versus the five, depending upon where you chose to put that, it would still make the settlement amount reasonable, whether or not these contracts were judged one way or the other. JUDGE SCHAER: Follow up to my earlier question about the administrative and general expenses. Looking at the Exhibit No. 11, increase from 1995 to 1996 is partially explained by the pension funding and partly explained by 1995 expenses being written off as part of merger costs. That was my understanding of your previous answer. MR. DUKICH: Right. JUDGE SCHAER: What was the dollar amount of the merger costs that were written off in 1995 that otherwise would have been expensed? MR. DUKICH: I don't know if I have that. Can I check a second? JUDGE SCHAER: Certainly. MR. DUKICH: We don't have it broken down by jurisdiction and service, but the total amount that the company wrote off was about $17 million. JUDGE SCHAER: Okay. I was looking at the difference between those years and see the pension costs were about $400,000; is that correct? MR. DUKICH: Yes. JUDGE SCHAER: And the total of the 1995 to 1996 increase is over a million. That's why we were concerned to know what else composed that. MR. DUKICH: There were some deferred -- I didn't go into the long litany of things. There was also some deferred computer costs that normally would have been incurred during that year but pending the outcome of the merger were deferred and not done until the next year. I think there were some other categories like that. Those kinds of operation activities that would probably explain the difference. MR. LOTT: Judge Schaer, this is Merton Lott. I just want to point out staff's analysis of that indicated there was almost $600,000 related to the pension costs. And if you take inflation into concern there's only about less than a million dollars difference between the two years. We tried to do analysis of why there was an increase, so less than a million dollars and $600,000 of it was pension. JUDGE SCHAER: Thank you, Mr. Lott. Anyone else? Get into another area that you've been previously asked about but I am still a little bit confused about. On page 2 of the stipulation, paragraph 2, the parties reference the company's 1998 purchased gas cost tracker filing, and indicate that that cannot occur sooner than November 1, 1998, and I believe I just heard you reference in an answer to Commissioner Gillis a 1998 tracker filing that's going to be made in January of 1998, and just so that we don't have any ambiguity about the meaning of that language and how it would affect the filing that you're contemplating, would someone explain to me a little bit further about what you're going to be doing in 1998, January of 1998, because my first reading of this language was that you wouldn't be allowed to do that, and if that's not the case, the parties have agreed to something different, then I would like all of the parties to acknowledge that and I would like to have that explained on the record. MR. LOTT: Can I just speak for staff? Originally we anticipated a 1997 filing in December. The company did not file their tracker in December and the filing that they talked about earlier, January 1, 1998, is staff 1997 filing, and therefore I would have to say that the tracker that's referred to on this page is referring to the next tracker after the January 1, 1998, but just that is a change, because the anticipation it was originally a December 1 tracker filing, which has since come and gone. MR. DUKICH: The short answer is that the tracker to be filed is really a '97 tracker. JUDGE SCHAER: Is that a shared understanding of all parties? MR. LAZAR: The 1997 tracker that I expected would have been filed by now but will apparently now be a January filing is the zero net change filing. We expect that the fall 1998 filing will reflect an increase on the order of two to maybe three cents a therm increase substantially driven by an expiration of some refunds of passed over collections