WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND ) DOCKET NO. UG-971695 TRANSPORTATION COMMISSION, ) Complainant, ) VOLUME II ) Pages 12-50 v. ) CASCADE NATURAL GAS ) CORPORATION, ) Respondent. ) _____________________________) A hearing in the above matter was held on June 15, 1998, at 9:30 a.m., at 1300 Evergreen Park Drive Southwest, Olympia, Washington, before Administrative Law Judge DENNIS MOSS. The parties were present as follows: The COMPLAINANT, by Sally G. Johnston, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504-0128. The RESPONDENT, by John West, Attorney at Law, 4400 Two Union Square, Seattle, Washington, 98101. NORTHWEST INDUSTRIAL GAS USERS, by Edward A. Finklea, Attorney at Law, 526 N.W. 18th Avenue, Portland, Oregon, 97209. Barbara L. Spurbeck, CSR Court Reporter PANEL OF WITNESSES: MICHAEL PARVINEN JAMES RUSSELL JOHN STOLTZ ____________________________________________________ INDEX OF EXHIBITS ____________________________________________________ EXHIBIT: MARKED: ADMITTED: Bench Exhibit 1 18 19 JUDGE MOSS: Let's go on the record. Good morning, everyone. I think I've met most of you. For those I have not met, my name is Dennis Moss. I am the presiding Administrative Law Judge in this matter of Washington Utilities and Transportation Commission against Cascade Natural Gas Corporation, Docket Number UG-971695. We had a prehearing conference on April 17th, and at that time had established an initial hearing date of -- I believe it was May 20th, at which time we were going to hear the Company's direct case and have cross-examination. On, I believe it was May 18th, I received a telephone call from Staff Counsel, indicating that the parties had achieved a settlement in the case and would shortly be filing a stipulation. The Commission issued a notice suspending the procedural schedule and establishing this date, June 15th, 1998, as the time for a brief hearing, at which time the Commission would have an opportunity to inquire into the terms of the stipulation and satisfy itself on the record with respect to the various elements of the agreement, so that it might act accordingly. So that is why we are assembled here this morning. And pursuant to discussions that have been held off the record, our basic format will be we have a panel of three witnesses this morning. I'll take appearances in the case, I'll swear the witnesses, and then we will go straight into a question and answer session. I do have some questions. I would like to say, as a prefatory matter, commend the parties for having taken the effort and the initiative to negotiate and achieve a settlement in the case. My questions this morning are directed to a complete understanding on my part. As the Commissioner's representative, it will be my responsibility, in part, to be sure that they understand the settlement, and in order for that to be possible, of course, I have to fully understand the settlement. I do have something of a penchant for detail, so I will ask some questions about detailed points in the settlement exhibits that I don't understand or that I think might require some correction, dates, that sort of thing, and then I have some broader questions. There's some points I don't understand, and I'm sure the witness panel is going to be able to enlighten me this morning. So with that, let's first take appearances. For Cascade. MR. WEST: My name is John West. I'm Counsel for Cascade Natural Gas Corporation. My address is 4400 Two Union Square, Seattle, Washington, 98101. My telephone number is 206-622-8484. JUDGE MOSS: Staff. MS. JOHNSTON: Appearing on behalf of Commission Staff, Sally G. Johnston, Assistant Attorney General. My address is as previously noted. JUDGE MOSS: And for the Northwest Industrial Gas Users? MR. FINKLEA: For the Northwest Industrial Gas Users, my name is Edward A. Finklea, with the law firm Energy Advocates, LLP. Our business address is 526 N.W. 18th Avenue, Portland, Oregon, 97209, 503-721-9118. JUDGE MOSS: Okay. In addition to noticing this proceeding for this room, the Commission's offices in Olympia, the notice did include the option for parties or interested persons to appear, attend by bridge conference line. And I have activated that line. Let me ask if there's anyone present on the line? Hearing nothing, I will assume that no one has elected to participate in that fashion. It now being 9:40, and the notice providing that no one should call in later than 9:25 in the morning, I'm going to turn that system off and make it available for other uses. All right. We have the appearances. As I did indicate, we have a panel of witnesses, so I'm going to swear the witnesses all together. I ask that you please rise and face me. Whereupon, MICHAEL PARVINEN, JAMES RUSSELL, and JOHN STOLTZ, having been first duly sworn by Judge Moss, were called as witnesses herein and testified as follows: JUDGE MOSS: Thank you. Please be seated. Okay. I understand that there are no preliminary statements from the witnesses, and so we will begin with my questions. I have reviewed the stipulation in considerable detail. I suppose, actually, the first order of business will be to make it part of the record. I have called for the stipulation and the attachments to it, which consist of various proposed revised tariff sheets and schedules in support of those tariff sheets to be made an exhibit, so I will identify Bench Exhibit Number 1 as the proposed stipulation and attachments. I understand that's likely to be our only exhibit today, although we certainly will leave room, if necessary. And I can't expect that there would be any objection, but as a matter of form, we always ask. And hearing nothing, that exhibit will be admitted. Okay. I mentioned that I do have something of a penchant for detail. I want to be sure I understand the stipulation. Let me first simply flip through it and look over my notes, and I'll ask a few detail questions, and the appropriate witness can perhaps simply chime in and tell me the answer. Looking at the proposed stipulation itself, I'm on page one, the introduction, there's an amount indicated on line three of $8,593,980, and this is a net increase, and I'm assuming that's a net revenue increase of that amount. And then, in parentheses, it says 8.49 percent, and I'm not sure what that represents. Would somebody tell me what that 8.49 percent represents? Mr. Stoltz. MR. STOLTZ: John Stoltz, with Cascade Natural Gas Company. I believe that number represented the increase in revenues that the proposed -- original proposed rates would have generated. JUDGE MOSS: So the eight million and some odd thousand figure there would be 8.49 percent increase in overall revenue? MR. STOLTZ: That's correct. JUDGE MOSS: Okay. On page two of the stipulation, under the heading PGA, the last sentence there that begins, "The difference between," at the very end, there's a reference that says "plus the revenue adjustment factor." I'm not sure what that is or where I find that. Mr. Stoltz, again, perhaps you'd be the one to explain that. MR. STOLTZ: Revenue adjustment factor is normally the revenue sensitive costs associated with a change in expense. To recognize the revenue impact of a change of expense, you have to also include the revenue sensitive costs that increase. JUDGE MOSS: So taxes, for example? MR. STOLTZ: Right. I'm not sure that's exactly what this is referring to there, but that's the way I would understand that testimony. JUDGE MOSS: Yeah, that makes a lot of sense to me. Okay, fine. All right. MR. PARVINEN: If I could interject? JUDGE MOSS: Yes. MR. PARVINEN: Michael Parvinen, with the Staff. That is what that number refers to, is those revenue sensitive items. The rate can be found on schedule one of one, page two of eight, the second line from the bottom. JUDGE MOSS: And that's referred to there as the revenue adjustment factor? MR. PARVINEN: Yes. JUDGE MOSS: Okay. And while we're on that page, I'll jump ahead. I didn't understand those two percentages there, the 11.64998 and the negative 8.42848. What are those? What do they represent? MR. STOLTZ: Those are -- I believe those are just some numbers that were calculated off on the side. They probably should not have been printed on this exhibit. They appear to represent the change in the commodity component of cost between the proposed average rate and the current average rate as the 11 percent increase, and the next number, the nine percent increase, would be the change in the demand cost. JUDGE MOSS: Okay. I think the answer's probably I don't need to understand them, but I just wanted to be sure. And let me ask you, to the left of that 11 percent figure there, it says "Current average rate in rates." I'm wondering if there's a typo there. Is that supposed to say just what it says, or is it current average something else in rates? MR. STOLTZ: It is rate in rates. JUDGE MOSS: Okay, all right. And that would be the commodity thing? MR. STOLTZ: Right. JUDGE MOSS: Okay, very good. Okay. We'll return in a moment to the mechanisms described in the proposed stipulation, but that covers the details in that part of it. Let me now look through the attachments and be sure I don't have any more questions on those. Looking at the exhibit, page seven of eight -- it looks like we're all on the same page -- is the date there correct, 6/30/95? I gathered it should be '97, but I -- MR. STOLTZ: I believe that's correct. It should be '97. That is a typo. JUDGE MOSS: Okay. MS. JOHNSTON: Thanks for catching that. JUDGE MOSS: Small matter, but, you know, you never know if it might turn out to be one of great consequence. Okay. Now, one other question on these exhibits, and I think that will complete those inquiries. Looking back at pages one of eight and two of eight, which show some similar entries and changes from one period to another or one proposal to another, what have you, on the daily balancing non-core credit near the bottom of the page, I understood the derivation of that, on page two of eight, I believe, which seemed to be arrived at by taking the therms under the units column, 586 million, some odd, and simply multiplying it by the balancing factor of .00020, yielding the 117,233. Is that essentially how that's calculated? MR. STOLTZ: Yes, it is. JUDGE MOSS: Okay. Now, when I went back to the prior exhibit and I see the figure of 364,560, which was determined, I believe, using the old balancing rate -- or I should say the current balancing rate of .00050, when I ran that on my calculator on the volumes indicated on page two, I don't think I came up with that same number, so I'm wondering how that was derived? MR. STOLTZ: There was a different volume associated with the earlier number. I don't have that detail in front of me, but -- JUDGE MOSS: And that would have been from a different period, presumably? MR. STOLTZ: Yes, it was. JUDGE MOSS: Okay. I don't need the detail. I just wanted to make sure I understood how the things were derived, since we are comparing from page one to page two there, I wanted to be sure I was looking apples to apples. Okay. That covers those. Are there any other things that the parties have found in the exhibits that might need changed? Probably you would have told me that at the outset, so I guess not. MS. JOHNSTON: I have a question, Your Honor. JUDGE MOSS: Go ahead. MS. JOHNSTON: Mr. Stoltz, on page one of eight, the second column, it says 11/1/95 rate. Should that also be '97? MR. STOLTZ: No, 11/1/95 is the correct rate. These are a portrayal of the embedded gas costs. Therefore, they refer to the previous tracking which was implemented, associated with a date of 11/1/95, although that was not the effective date of that tracker. MS. JOHNSTON: Okay, thank you. JUDGE MOSS: Okay, good. All right. One of the things I do in preparing for a case like this is sit down and start drafting through some of the preliminary matters that will appear in any order. And one thing that came to my attention as I did that in this case was that I don't really understand all the time frames involved, so I want to be sure I do understand that. And the question is a bit general, really, and it might be appropriate for counsel to respond or the witnesses. I think, Mr. Stoltz, you've probably been doing this for Cascade for a while, so you probably have these answers. I'm not sure about Staff's prior involvement. In any event, my first question is does Cascade follow a prescribed cycle for PGA and deferral amortization filings? Is there a prescribed period of time during which those filings are -- MR. STOLTZ: There's no set rules on when we would file PGAs. We generally review our changes in gas cost annually, and if there's a significant change, we'd file annually. We generally attempt to file in the fall, after we've negotiated our new prices for the upcoming winter and had those known and measurable. Then we'll do our analysis. If there's a significant change at that time, we make our application requesting something like a December 1st effective date. JUDGE MOSS: Okay. Now, in this case, one of the concerns is a $7.7 million deferral amortization account debit. Over what period did that accrue? I believe it started in March '96, but I'm not sure what the ending date was. MR. STOLTZ: It was about a 16 or 17-month accumulation period. JUDGE MOSS: Is there a date that you could identify that would correspond to what we might think of as a test period date? In other words, is there a cut-off from this filing? MR. STOLTZ: We normally look at the data through the 12 months ended June 30 in a PGA application such as this. JUDGE MOSS: And what sort of data lag do you have? You have actual data through about when? MR. STOLTZ: We have actual billing determinants at that time. And as I say, normally at the time of preparing these -- at the time of filing and preparing the application, we have completed our negotiations of new gas costs and are able to include those as known and measurable. JUDGE MOSS: Okay, good. I'm sure it can be determined from the materials that have been submitted, but I didn't figure it out, so please tell me, what's the total increase in annual revenue that results under the stipulation? MR. STOLTZ: There is an exhibit or a schedule attached to this exhibit, page five of eight, which shows the revenue impact based upon the therms sold during the 12 months ending June 30, 1996 -- or '97. And that shows a revenue impact of $4,477. JUDGE MOSS: Okay. But there's also some amount in here -- or maybe there's not -- on the deferral amortization, that's an additional amount of revenue that's going to be recovered under the stipulation; is that right? MR. STOLTZ: Under the stipulation, the way we have handled the deferral side of the application is to terminate earlier amortization of deferred accounts. And we'll take the unamortized balance of those accounts compared to the new ones and reexamine those at the next PGA application. So the rate impact the customer sees here is the termination of the previous refunds of deferrals. There is a revenue impact. It's not shown in any of these schedules. JUDGE MOSS: Okay. So there's no increase in -- this really is getting -- moving us right into the heart of my failure to understand some parts of the settlement. And in particular, it is the deferral amortization part of it that I want to be sure I'm clear on, because the treatment of that in the language of the stipulation is -- MR. STOLTZ: We are not requesting any change in that at this time. That took place on December 1st, I believe the date was, and there is a schedule in here -- I'm sorry, January 1st, I guess it was. It's a schedule entitled Temporary Technical Adjustment, Schedule Number 595. JUDGE MOSS: Okay. I have that. MR. STOLTZ: That was segregated from the PGA side of this application and placed into effect on January 1st of 1998. Again, what this schedule did was terminate the earlier amortizations that were going on. JUDGE MOSS: And was that the approximately $7 million that was being amortized from the last rate case over this term? As I recall, and this is really -- I went back to the last rate case order, and as I understood that order, there were basically three things done with deferral amortization balances at that time. One thing was $13 million was put aside in a new deferral amortization account, and it was to accrue interest at the short-term borrowing rate. And that amount, as I understand that, was to be available to Cascade for capital improvements or what have you. There was another $7 million, approximately, that was to be amortized and refunded -- or paid back to the customers, amortized as of the effective date of that last case, which I believe was August of '96. And that was to be paid back over a period of four years. And then there was another amount that's not specified in that settlement that was to be paid back over one year to the industrial customers. And you're nodding in the affirmative that that's essentially correct? MR. STOLTZ: It matches mine. I can't confirm the numbers, but the approximate $7 million is my recollection, and four-year amortization is correct, and that is what we terminated on January 1st. JUDGE MOSS: That is the heart of the matter for me. That is the $7 million. And the $7.7 million debit that was -- as filed in this case, there was an offset of that 7.7 against the remaining balance of the seven million that was amortized beginning August 1, 1996? MR. STOLTZ: That is correct. JUDGE MOSS: Okay. So I do understand that correctly. Now, what was the net for purposes of this case? Or was there a net? MR. STOLTZ: There is a net occurring. What we will do is review the balances of those accounts at some next date certain -- probably June 30 of this year will be our next review period. We'll look at the balances at that time, and we'll know the effect. Those deferrals that were originally requested are now continuing to accumulate credits and debits, as the case may be. JUDGE MOSS: Okay. And when that is reviewed, will that be a subject of the next PGA? MR. STOLTZ: Yes, that's correct. JUDGE MOSS: Okay. And that could be six months from now or a year from now? MR. STOLTZ: That's correct. JUDGE MOSS: Depending on how severe it is, I would imagine, in one direction or another? MR. STOLTZ: Also correct. JUDGE MOSS: Yes, okay. All right. Well, we just saved about ten questions. I got there in a hurry, so that's good. Now, the interim filing that we talked about, the one that became effective pursuant to the Commission's order, complaint and order entered in this case, that's that rate -- tariff sheet you referred me to a moment ago. As I understand the stipulation, it is simply that that interim rate will be continued pending your next PGA filing? MR. STOLTZ: Yes, that's correct. JUDGE MOSS: Now, that temporary technical adjustment, as it is referred to on the title of that Schedule Number 595, that increased revenues, if I understand the stipulation correctly, by $1,367,764? MR. PARVINEN: Yes. JUDGE MOSS: Mr. Parvinen. And that's on an annual basis? MR. PARVINEN: Yes. JUDGE MOSS: Okay. And that compares to $3,120,512 on an annual basis that was originally requested? MR. PARVINEN: Yes. JUDGE MOSS: Okay. Then I do understand that part. Okay. All right. That completes my questions on the deferral amortization. I have a couple of questions on the balancing charge component of the settlement. The settlement in Docket Number UG-951415, or at least the PGA dockets that were consolidated with that, provided for a .0005 dollars per therm balancing charge. And as I understand it, that was to be paid by non-core customers and credited against the core customers' cost of gas. Mr. Stoltz is nodding in the affirmative? MR. STOLTZ: That is correct. JUDGE MOSS: Okay. Now, that settlement in the previous case also called for filing in this case, quote, cost justification for continuing or adjusting this rate. Was there a cost justification study filed or prepared in anticipation in this case? MR. STOLTZ: Yes, there was. It was filed on December 12th. JUDGE MOSS: Okay. Now, the proposed stipulation in this case provides for a continued daily balancing charge somewhat less than half of the previously approved balancing charge. As I read it, it's .0002 dollars per therm; is that correct? MR. STOLTZ: That's correct. JUDGE MOSS: And I'm interested in hearing a little more about this. Is there a cost justification for that balancing charge or is there a policy justification for it? What is the basis for that? MR. STOLTZ: I'd have to say that that's more of a policy justification for a continued charge. The December 12th study that the Company prepared did not find any definitive cost associated with providing daily balancing. However, the Company recognizes that its system, by means of diversity, does provide some benefits. It's the measurement of those benefits which is very difficult to quantitatively analyze. And as a result, we negotiated a rate representative of benefits between now and the next general rate case that the Company may file. JUDGE MOSS: And Staff is satisfied that the negotiated per therm balancing amount is justified and in the public interest? MR. RUSSELL: Jim Russell, Commission Staff. Yes, we are. The original rate of .0005 was sort of a placeholder for a daily balancing rate, because, in that case, it was a settled case and we didn't have any data to develop a specific rate for Cascade Natural. That rate was very close to the Washington Natural rate of .00048, established in a fully-litigated cost of service case. So we simply rounded it up to the .0005, and in that case, there was an opener for the Company to come back later to justify either zero or some rate other than the .0005, and the Company did file the cost justification. But it's Staff's opinion in this case that, although there may not be any incremental costs to provide this service, there are common costs that the Company incurs to provide this daily balancing service. And we looked at -- we're comfortable with the .0002 because, in the Washington Natural case, the daily balancing provisions during entitlements were a little bit -- were stricter than they are today. So basically, it's a negotiated dollar amount that we are comfortable with, given today's circumstances. JUDGE MOSS: Okay. Mr. Russell, thank you for that answer. And I think Mr. Stoltz touched on the point that this is a subject that can be revisited in a general rate case, but will not be revisited in the Company's next PGA under the terms of the settlement? MR. RUSSELL: That's correct. JUDGE MOSS: And Staff believes that's the appropriate way, from a policy standpoint, to consider this matter? MR. RUSSELL: Yes, we do. We like to keep PGAs as straightforward and simple as possible, and this will do that for us. JUDGE MOSS: I think that sounds entirely appropriate to me. Now, I do have a few questions, moving on from the balancing issue to on the PGA itself. The stipulation, I believe, explains very nicely the basis for the adjustment that was made as a result of the parties' negotiations. It refers to several specific adjustments, including a $3 million adjustment to account for expected capacity release revenue. Is there a specific period for that $3 million? Is that a 12-month figure? MR. STOLTZ: Yes, it is. JUDGE MOSS: Does Cascade expect to be able to sustain the current level of capacity release revenue for the next 12 months? MR. STOLTZ: It's hard to say what the secondary market will do. We feel confident that we can come close to that number. JUDGE MOSS: Okay. And that secondary market, has that been fairly stable recently or has it been fairly volatile? MR. STOLTZ: It's volatile. It's a very volatile market currently. Capacity releases for Canadian supplies is going close to a hundred percent of contract value, but probably less than 25 percent for domestic capacity. And those can change, depending on the cost of the supply located in those supply basins. JUDGE MOSS: Okay. MR. PARVINEN: And Staff is very comfortable with using a number that was representative of the previous 12 months. Cascade has been increasing their capacity release dollars over the past several years, so the previous 12 months seemed like a real reasonable number to use, and the three million is essentially that number. JUDGE MOSS: Okay, thank you. Now, the proposed stipulation also says the parties adjusted gas supply contracts to more closely reflect contracted rates and volumes. This resulted in a reduction of approximately $2 million. I want to try to be a little more precise here, as I -- if it falls upon me to draft an order, I'll, of course, be describing this settlement. And this is a small point, but I don't imagine there's actually any adjustment to the contracts themselves, and so I'm wondering if it would be slightly more precise to say that the parties adjusted gas supply cost to more closely reflect contracted rates and volumes. Is it cost we're adjusting here? I think that's probably the case. MR. STOLTZ: Certainly we are adjusting cost. There were some underlying details that were also corrected on volumes, but those also resulted in costs that are now removed that were in the original filing. JUDGE MOSS: Yes, so rates and volumes were adjusted to, and that resulted in an adjustment to the cost proposed under the stipulation? MR. STOLTZ: Yes, that's correct. JUDGE MOSS: That's the distinction I'm drawing here, is the difference between adjusting cost versus adjusting contracts. I didn't imagine that you actually said, Okay, we're not going to consider this contract, and we're going to say this contract really says ten cents when it provides for five. You didn't do anything like that? MR. STOLTZ: Again, there's some devil in the details there. JUDGE MOSS: Usually, there is. MR. STOLTZ: What we used for developing the original cost had an error in it and it was picking up a contract that it shouldn't have been picking up, and therefore, we did adjust the contract and revised that. JUDGE MOSS: Okay. Well, I think that gives me an understanding that will allow me to draft language I'm comfortable with, if that falls upon me to do so. Mr. Parvinen, did you have something to add? MR. PARVINEN: I would concur with that. I think what it also did was, by the time this settlement exhibit was prepared, the company had the ability to go back over this last winter heating season and see how they actually used those contracts and adopt that usage more closely. JUDGE MOSS: And that gave us a more precise analysis, perhaps, in terms of actual data? MR. PARVINEN: Right. JUDGE MOSS: Good, okay. And finally, the approximately $2 million, I don't know, maybe I was born to be an accountant instead of a judge, because approximately two million -- I had a statistics professor one time who said, if the number is round, suspect it. Is the dollar amount actually 1,963,749? That's the best I could come up with. Now you're going to want to know how I did that, and I don't remember. Actually, I believe what I did was look at page two of eight of the settlement exhibit and probably derived that from the embedded difference column. MR. PARVINEN: Yes, that was it. That was it exactly. Well, that was it exactly, with the exception of the -- that would be the change in the commodity portion. There were also some slight changes on the demand portion, the column next to that, which are also netted against that three million figure and the 117,000 from item three in the stipulation. JUDGE MOSS: Okay. Yeah, in fact, the daily balancing -- yeah, the daily balancing reduction, 117,000, that's accounted for separately in the stipulation? MR. PARVINEN: Right. To get to what the two million actually is, if you look -- the original number in column three at the bottom was 61,612,505. JUDGE MOSS: We're still on page two of eight? MR. PARVINEN: Yes. JUDGE MOSS: I haven't found that figure yet. Sixty-one million -- MS. JOHNSTON: I don't see it, either. MR. PARVINEN: That would be from the original application. MR. STOLTZ: It's not part of the stipulation. MR. PARVINEN: It's not part of the stipulation and it wasn't part of the testimony, either, so -- JUDGE MOSS: Sure, okay. MR. PARVINEN: But it was that number less the -- to the current number of $56,000,531 -- and $520, that difference, less the three million, less the 117,000, would equal approximately two million. JUDGE MOSS: Okay, all right. I'm convinced that any order the Commission issues is going to say approximately two million. MS. JOHNSTON: There's that word again. JUDGE MOSS: But it doesn't hurt to ask. Now, let's not waste any more time on that. All right. That concludes my questions. I will ask if the witnesses have anything else they want to offer to me with respect to the s