1 BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION 2 COMMISSION 3 4 WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) 5 ) Complainant, ) 6 ) vs. ) UG-970932 7 ) NORTHWEST NATURAL GAS COMPANY, ) VOL. 2 8 ) PAGES 12 - 52 Respondent. ) 9 ----------------------------------- 10 11 A hearing in the above matter was held on 12 October 20, 1997, at 11:00 a.m., at 710 Esther 13 Street, Vancouver, Washington, before Chair Anne 14 Levinson, Commissioner William Gillis, and 15 Administrative Law Judge C. Robert Wallis. 16 The parties were present as follows: 17 NORTHWEST NATURAL GAS, by Susan B. Bergles, Attorney at Law, 220 Northwest 2nd Avenue, 18 Portland, Oregon, 97201. 19 20 NORTHWEST INDUSTRIAL USERS, by Paula E. Pyron, Attorney at Law, Suite 1100 One Main 21 Place, 101 SW Main Street, Portland, Oregon, 97204. 22 23 PUBLIC, by Simon ffitch, Attorney at Law, 900 Fourth Avenue, Suite 2000, Seattle, 24 Washington, 98164. 25 00013 1 APPEARANCES (Continued) 2 WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by ROBERT CEDARBAUM, Assistant 3 Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington, 98504. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 00014 1 I N D E X 2 WITNESS: DIRECT CROSS 3 Mr. DeBolt 18 4 5 EXHIBIT MARKED ADMITTED 1 9 12 6 2 9 12 3 9 12 7 4 9 12 5 10 12 8 6 10 12 7 10 12 9 8 10 12 9 10 12 10 10 10 12 11 10 12 11 12 10 12 13 10 12 12 14 10 12 15 11 12 13 16 11 12 17 11 12 14 18 11 12 19 11 12 15 20 11 12 21 11 12 16 22 11 12 23 12 12 17 18 19 20 21 22 23 24 25 00015 1 P R O C E E D I N G S 2 JUDGE WALLIS: The hearing will please 3 come to order. 4 This is docket number UG-970932. It's 5 a complaint by the Washington Utilities and 6 Transportation Commission versus Northwest 7 National Gas Company, the respondent, regarding 8 some proposed tariffs for a rate increase that 9 the company has filed with the Commission. 10 This hearing is being held at 11 Vancouver, Washington, on October 20th, 1997, 12 before members of the Commission Anne Levinson, 13 Chair, and William Gillis, Commissioner, and 14 myself. My name is Bob Wallis, and I am the 15 presiding Administrative Law Judge today. 16 We're going to begin, I think, with 17 asking counsel to identify themselves for the 18 record. 19 Please state your name and your 20 business address and the name of the client that 21 you represent. 22 MS. BERGLES: I am Susan Bergles 23 representing Northwest Natural Gas. My business 24 address is 220 Northwest 2nd Avenue, Portland, 25 Oregon, 97209. 00016 1 MR. CEDARBAUM: My name is Robert 2 Cedarbaum. I'm an Assistant Attorney General 3 representing the Washington Utilities and 4 Transportation Commission Staff. 5 My business address is the Heritage 6 Plaza Building, 1400 South Evergreen Park Drive 7 Southwest, Olympia, zip code 98504. 8 MS. PYRON: Paula Pyron, here on 9 behalf of the Northwest Industrial Gas users, 10 with Ball, Janik LLP, 101 Southwest Main, Suite 11 1100, Portland, Oregon, 97204. 12 MR. FFITCH: Simon ffitch, Assistant 13 Attorney General, I'm with the office of Public 14 Counsel of the Attorney General's Office 15 representing residential and small business 16 customers. 900 Fourth Avenue, Suite 2000, 17 Seattle, Washington 98164. 18 JUDGE WALLIS: Are there any other 19 appearances to be made this morning? 20 It appears that there are not. So 21 let's proceed. 22 We're going to begin this morning with 23 a presentation by Mr. Cedarbaum, who is the 24 Assistant Attorney General representing the 25 Commission Staff, describing the process by 00017 1 which agreement was reached and describing the 2 nature of that agreement. 3 Mr. Cedarbaum. 4 MR. CEDARBAUM: Thank you. 5 This filing began as an increase in 6 general rate relief by the company. Since the 7 filing was made the parties have had settlement 8 discussions and have settled and presented a 9 settlement to the Commission. 10 There are a number of elements to that 11 settlement agreement, which I'll just describe 12 briefly. 13 The settlement agreement is also 14 based, Your Honor, upon the admission of some 15 evidence which is explained and set forth in 16 Attachment A to our settlement, so we would ask 17 that Exhibits 1 through 22, and then the Public 18 Exhibit, Exhibit 23, be offered into evidence. 19 With respect to the basic outline of 20 the settlement, the company's original filing 21 asked for an increase of about 1.2 million 22 dollars. 23 The settlement on revenue requirements 24 would increase the company's revenues by about 25 $600,000 -- just a little bit over $600,000 -- 00018 1 on an annual basis. 2 There are two pieces to that 3 increase. One has to do with general rate 4 relief of about $549,000, the remaining piece 5 has to do with the amortization of some post 6 retirement benefits, according to financial 7 accounting standards 106, which amounts to about 8 56 to $58,000. 9 I would note, Your Honor, just for the 10 record, that there are amounts in the materials 11 that we provided to the bench of 606,000 or 12 608,000. Those numbers are both actually 13 correct. We're talking about a rounding amount 14 with respect to the deferral portion concerning 15 FAS 106. 16 So as long as the Commission's order 17 reflects an amount of about 606 to 608,000, the 18 tariffs will produce the actual amount that they 19 should. 20 The rate of return that the settlement 21 includes is an overall return of 9.55 percent, 22 which includes a return on equity of 11 and a 23 quarter percent. 24 With respect to rate spread, the 25 settlement would produce an average increase for 00019 1 all rate schedules of about three percent. And 2 there are attachments to the stipulation which 3 set forth increases in class rates and amounts, 4 so that the Commission can follow along with 5 that. 6 There are also changes in rate design 7 concerning customer charges and transportation 8 rates, and finally, main extension policy. 9 Those are the basic high points of 10 what the settlement is about. 11 There are witnesses that will be 12 presented this morning that will answer 13 questions from the Commissioners that -- on the 14 specifics. Those witnesses from the Commission 15 staff are James Russell and Henry McIntosh. 16 Mr. Russell is furthest away from me. 17 Mr. McIntosh is in the middle, and then from the 18 company is Bruce DeBolt, who is the chief 19 financial operating officer -- chief financial 20 officer. Excuse me. 21 Mr. Russell with the Commission staff 22 is responsible for revenue requirement 23 questions; Mr. McIntosh for rate spread and rate 24 design, and for the company, Mr. DeBolt, 25 everything, I suppose, and policy questions that 00020 1 may come up from the Commissioners. 2 Those were all the comments I wanted 3 to make. I don't know if counsel wants to add 4 to that or not. But if not, I think we're ready 5 for questions of Commissioners, either of 6 counsel or the panel. 7 JUDGE WALLIS: Do other counsel have 8 anything to add? 9 Let the record show there's no 10 response, for purposes of the record. 11 I would like to note that Attachment A 12 to the proposed settlement agreement consists of 13 an index of documents that have been submitted 14 to the Commission, and they reflect Exhibits 1 15 through 22. 16 Direct testimony of Bruce R. DeBolt, marked 17 as Exhibit 1; 18 1996 Annual Report to Shareholders, 19 marked as Exhibit 2; 20 Direct Testimony of Kyle H. Evans, 21 marked as Exhibit 3; 22 Balance Sheet (Page 1 of 4), Income 23 Statement (Page 2 of 4), System Rate Base by 24 Components (Page 3 or 4), Cost of Capital 25 Computation (Page 4 of 4), marked as Exhibit 4; 00021 1 Direct Testimony of Kevin S. McVay, 2 marked as Exhibit 5; 3 Adjusted Results of Operations for the 4 12 Months Ended June 30, 1996, marked as Exhibit 5 6; 6 Direct Testimony of Dr. Francis P. 7 Ferguson, marked as Exhibit 7; 8 Derivation of Washington Revenue 9 Requirement, Page 1, Proposed Equal Percent of 10 Distribution Margin Rate Spread, Page 2, 11 Proposed Rates Resulting from Washington General 12 Rate Case, Pages 3-4, Proposed Rate Impacts by 13 Class of Service, Page 5, marked as Exhibit 8; 14 Direct Testimony of Randolph S. 15 Friedman, marked as Exhibit 9; 16 Direct Testimony of Richard J. 17 DeFerrari, marked as Exhibit 10; 18 NPC Interstate Pipeline Facilities 19 Map, marked as Exhibit 11; 20 Camas Gate/Line Map, marked as Exhibit 21 12; 22 List of Company's Special Contract 23 Customers, marked as Exhibit 13; 24 List of Special Contract Customers' 25 Terms, marked as Exhibit 14; 00022 1 Direct Testimony of Onita R. King, 2 marked as Exhibit 15; 3 Summary of Tariff Format Changes, 4 marked as Exhibit 16; 5 Discontinued Rate Schedules, marked as 6 Exhibit 17; 7 New Rate Schedules, marked as Exhibit 8 18; 9 Schedule Title or Number Changes, 10 marked as Exhibit 19; 11 Supporting Material: Schedule C, 12 "Miscellaneous Charges", marked as Exhibit 20; 13 September 22, 1997 Letter from Susan 14 K. Ackerman to Steve McLellan, marked as Exhibit 15 21; 16 UG-970932 Settlement Agreement, marked 17 as Exhibit 22. 18 (Marked Exhibits 1 through 22.) 19 JUDGE WALLIS: I do understand that 20 public counsel has an additional exhibit. Is 21 that correct, Mr. ffitch? 22 MR. FFITCH: That's correct, Your 23 Honor. We have an exhibit which consists of the 24 letters received from the members of the public, 25 customers, by the Commission's Consumer Affairs 00023 1 office, and I would ask that that be marked for 2 identification. It's my understanding that the 3 bench would mark that as Exhibit 23. 4 (Marked Exhibit 23.) 5 JUDGE WALLIS: That is marked as 6 Exhibit 23 for identification. 7 MR. FFITCH: And we have distributed 8 copies of that to yourself, Your Honor, and the 9 Commissioners, and also to counsel. 10 And when we get to the public 11 testimony portion, I can talk a little bit more 12 about what's in the letters. There are a total 13 of five letters attached to the exhibit. 14 We have not received letters at the 15 office of Public Counsel with regard to this 16 case as of last week. 17 JUDGE WALLIS: Thank you, Mr. ffitch. 18 Let me ask if there are any objections 19 to any of the Exhibits 1 through 23? 20 Let the record show that there is no 21 response and those exhibits are received into 22 evidence. 23 (Admitted Exhibits Nos. 1 through 23.) 24 JUDGE WALLIS: I would like to make 25 sure that our witnesses are sworn this morning, 00024 1 and I'd like to swear them all at the same time, 2 and then I'd like the sponsoring counsel to 3 identify the witnesses, have them state their 4 name and their business address for the record, 5 and if there are any direct statements that 6 these witnesses wish to make, this would be the 7 time to do that. 8 So I'm going to ask all of the 9 witnesses and potential witnesses, including 10 Mr. Lazar, whom I understand may also be 11 available to answer questions, to stand at this 12 time and raise your right hand. 13 14 THE WITNESSES 15 were thereupon duly sworn on oath by the 16 Administrative Law Judge 17 MS. BERGLES: Mr. DeBolt, would you 18 please state your name for the record, please. 19 MR. DeBOLT: My name is Bruce R. 20 DeBolt. I am senior vice president and chief 21 financial officer of Northwest Natural Gas 22 Company in Portland, Oregon. My business 23 address is 220 Northwest Second Avenue, 24 Portland, 97209. 25 MR. CEDARBAUM: Mr. Russell, will you 00025 1 please state your name and business address. 2 MR. RUSSELL: My name is James M. 3 Russell. My address is South 1300 Evergreen 4 Park Drive Southwest, Olympia, Washington, 5 98504. 6 MR. CEDARBAUM: And Mr. McIntosh. 7 MR. MCINTOSH: My name is Henry P. 8 McIntosh. I work at the Washington Utilities 9 and Transportation Commission. Business address 10 is the same as Mr. Russell's. 11 MR. FFITCH: Mr. Lazar, would you 12 please state your name and business address. 13 MR. LAZAR: Jim Lazar, 1063 Capitol 14 Way South, Suite 202, Olympia, Washington, 15 98501. I'm a consulting economist and have 16 assisted Public Counsel in this proceeding. 17 JUDGE WALLIS: Do any of the witnesses 18 have direct statements at this time? 19 MS. BERGLES: I believe Mr. DeBolt 20 does. Please proceed. 21 MR. DEBOLT: Thank you. As we proceed 22 into questions from Commissioners or others in 23 the room, we have present many, if not all of 24 the witnesses for the company, including Kyle 25 Evans, Kevin McVay, Dr. Frank Ferguson, Richard 00026 1 DeFerrari and Onita King. I think we have the 2 ability to answer questions in detail, as well 3 as on policy, and we'll be delighted to do so. 4 This is the first general rate 5 proceeding the company has had since 1986, and 6 this would be the first general increase in the 7 state of Washington since then. 8 During the intervening time period, 9 over ten years, our rates in Washington actually 10 have gone down, and this is also a time of 11 significant change within the service territory 12 that we cover. 13 Northwest Natural serves Clark County, 14 Skamania County and Klickitat County in 15 Washington. And during the time period that has 16 passed since the last case, our customer counts 17 have gone up by almost five times. 18 The profile also has changed 19 considerably from what had been primarily an 20 industrial-based system, to one that now is 21 heavily residential and commercial and looks 22 more like our system does throughout western 23 Oregon. 24 One of the many issues that we have 25 been discussing with the parties during the 00027 1 course of settlement discussions, has been a 2 policy that is under development to cope with 3 the additional growth in our service area. And 4 as you've seen, there is a provision under the 5 settlement agreement that changes the company's 6 main extension policy, which had not been 7 changed since the early 1960s. 8 We believe the change will more fully 9 make it possible for us to extend service to 10 customers on terms that are reasonable to 11 customers and the company. 12 During the next year, we will be 13 moving forward with some additional negotiations 14 with the staff, public counsel, and other 15 interested parties, to make even further changes 16 to the growth policies the company has in 17 place. 18 Thanks very much. 19 JUDGE WALLIS: Thank you, Mr. DeBolt. 20 Are there other statements? 21 MR. CEDARBAUM: I don't think so, Your 22 Honor. 23 JUDGE WALLIS: Miss Pyron. 24 MS. PYRON: I have one just briefly, 25 since we're not presenting witnesses this 00028 1 morning. 2 The Northwest Industrial Gas Users is 3 a signatory to the settlement agreement with the 4 provision that under the term of the settlement, 5 we don't have any opposition to any of the terms 6 of the agreement itself, because there's also a 7 provision that is not preferential to any future 8 case. 9 And because we didn't have a witness, 10 I just wanted to place that statement on to the 11 record. 12 Thank you, Your Honor. 13 JUDGE WALLIS: Thank you, Miss Pyron. 14 Is there anything further, before we 15 engage in questions? 16 It appears not. Do any counsel have 17 questions for any of the witnesses? 18 Do the Commissioners have any 19 questions for the witnesses? 20 MR. FFITCH: Excuse me, I'm sorry, 21 Your Honor, that went so quickly, I didn't 22 realize -- it's like bidding at the auction. 23 I did have a couple of questions, just 24 on a couple of clarifying points. 25 JUDGE WALLIS: Mr. ffitch, please 00029 1 proceed. 2 MR. FFITCH: I'll direct this first, I 3 guess, to you, Mr. DeBolt. 4 5 DIRECT EXAMINATION 6 BY MR. FFITCH: 7 Q. Just to clarify, this rate increase 8 that's involved in this case, does not include 9 potential future gas cost increases; is that 10 correct? 11 A. That is correct. 12 Q. Do you know the current gas cost 13 that's included in these rates? 14 A. The weighted average cost of gas that 15 is incorporated within current rates, was placed 16 into our rates in December of 1996. If you'll 17 give me a moment, I can get close. 18 Q. Subject to checking, would you be 19 comfortable with the rate of nine and a half 20 cents per therm? I'm not trying to trip you up 21 here. 22 On Schedule 2, original sheet 102.1? 23 A. Yes, I do see that. The commodity 24 rate of about 9.5 cents per therm. 25 Q. Do you know when the next tracker is 00030 1 planned for the company, or when that would next 2 come up? 3 A. Yes. The process is an annual one. 4 We will file, before the end of October, with 5 new rates proposed to be effective on December 6 1, 1997, incorporating the gas costs for the 7 coming contract year. 8 Q. Could you just explain, in simple 9 terms, what a tracker is, for members of the 10 public that are here? 11 A. Yes. What we call the tracking 12 process, is a way of taking our negotiated gas 13 costs and translating them into rates. 14 The gas costs are the sum of all the 15 natural gas supplies the company purchases from 16 a variety of suppliers. Our suppliers are in 17 western Canada, in the Rocky Mountains, and in 18 the U.S. Southwest. 19 We have negotiated a portfolio of gas 20 supplies each year, tending to negotiate during 21 the months of August, September, and October, 22 for the total portfolio that will be in place 23 for the following year. 24 And each year we translate those costs 25 scheduled as we actually would expect the gas to 00031 1 be delivered to customers, into rate levels. 2 There is no markup on a tracking; that 3 is to say, if our gas costs were to go up by 1 4 million dollars a year, then rates would go up 5 by enough to generate an additional one million 6 dollars a year plus taxes, but there is no 7 return component, so the tracking process 8 operates without an impact on earnings or rate 9 of return. 10 Q. So I guess putting it in simple terms, 11 it's fair to say that a tracker is a mechanism 12 that's been approved by the Commission to enable 13 the company to adjust its rates to take into 14 account changes in the cost of the gas that you 15 purchase without going through a full rate case 16 proceedings; is that fair to say? 17 A. Yes, that's correct. 18 Q. Do you know how big your next tracker 19 would be, what you would estimate -- well, let 20 me back up. I have an introductory question to 21 that. 22 You've testified that the gas cost 23 incorporated in the current rate case is nine 24 and a half cents per therm. Do you know what 25 the going rate for gas is at this time? 00032 1 A. I know approximately what the rate 2 change or the cost change has been over the 3 contract portfolio going forward. 4 We have not yet filed in either state, 5 we've not filed in Oregon or in Washington, but 6 we expect that the total increase in the 7 portfolio, for the year that starts on November 8 1st, will be about four and a half cents a 9 therm. 10 By comparison, the gas costs that are 11 the subject of tracking proceedings have gone 12 down in each of the past four years, so this is 13 the first time since 1993 that the tracking 14 mechanism will represent an increase in 15 customers' rates. 16 Q. Can you translate that impact into a 17 percent and what that would amount to for an 18 average residential customer, in terms of a rate 19 increase, once the tracker goes through? 20 A. I have not calculated what the 21 percentage increase would be for a residential 22 customer. 23 And there is a limiting factor, in 24 that we have some dollars of deferred credits 25 left over from last fall that would help to 00033 1 mitigate the impact of elections from our 2 deferred gas cost balances. 3 They will not help to mitigate the 4 actual purchase gas cost change of about 4.5 5 cents per therm, but the increase to gross rates 6 is about four and a half cents. It's not a 7 half, or 50 percent increase. Even though the 8 WACOG will go up 50 percent, I expect the 9 increase in customer rates will be more like 10 eight to ten percent. 11 Q. Thank you. That's above, in addition 12 to, the three percent that would be approved if 13 this settlement is agreed to by the Commission? 14 A. Yes, it would be. 15 Q. And just to translate that into an 16 average monthly bill, it appears that the impact 17 of the settlement today would be just under a 18 dollar for an average residential customer using 19 69 therms a month. 20 Would it be correct to say that the 21 impact of the tracker would be -- well, perhaps 22 I should just ask you what the impact of the 23 tracker would be for an average residential 24 customer using 69 therms a month. 25 A. I would estimate roughly it would be 00034 1 on the order of $3.00 to 3.50 a month in 2 addition. 3 Q. In addition to the 96 cents that would 4 be approved under this settlement? 5 A. Yes. That's an estimate. 6 Q. Thank you. 7 MR. FFITCH: Those are all the 8 questions that I have. 9 JUDGE WALLIS: Are there any further 10 questions or questions in the nature of 11 redirect? 12 Let the record show that there's no 13 response and now is the opportunity for the 14 Commissioners to ask questions. 15 CHAIR LEVINSON: My first question has 16 to do with the surcharge. 17 Could you clarify for me what process 18 you see using and for whom that surcharge would 19 be available? 20 MR. DEBOLT: Is the question about the 21 FAS 106 surcharge? 22 CHAIR LEVINSON: No, the 23 growth-related surcharge. 24 MR. DEBOLT: The growth-related 25 surcharge is not a part of this settlement, it's 00035 1 an approach which we hope to be able to discuss 2 with interested parties in the future. 3 What we see attempting to do, however, 4 is to have more of the responsibility for the 5 additional costs that are posed by an expensive 6 addition to the system, borne by those customers 7 who want the addition to take place. And it 8 should give that customer two choices. 9 The first choice would be once we have 10 identified the amount of investment the company 11 has to make to connect the new customer, and the 12 amount of revenue that the new connection would 13 bring in, that typically generates a number of 14 dollars that has to be collected as a connection 15 fee. 16 And frequently the number of -- the 17 amount of that connection fee is large enough 18 that it can be a burden to customers -- 19 potential customers, even with the new policy of 20 five times revenue. 21 What we hope the surcharge were to 22 accomplish would be that it would give the 23 potential customer a way to pay the equivalent 24 amount that otherwise would be cash up front 25 through a certain number of cents per therm of 00036 1 consumption over a period of time. 2 So, if you will, it's a budget payment 3 opportunity in order for the customer to be able 4 to afford service in the first place. 5 That's the basic concept. We will 6 explore that and probably modify that to some 7 extent as we move along, but it's one that we 8 think that meets the needs of the company and 9 the potential customer. 10 CHAIR LEVINSON: Does that become 11 available for all new customers after a certain 12 date in the future? 13 MR. DEBOLT: We think that's probably 14 the best way to do it. When that becomes 15 effective depends on how quickly we develop a 16 specific plan for it, but we will not be able to 17 implement the surcharge potential until we have 18 something worked out with the staff and with 19 public counsel. 20 CHAIR LEVINSON: Thanks. 21 MR. RUSSELL: I might just add a 22 little bit to that. We have negotiated and 23 implemented a conceptually similar mechanism 24 with Washington Natural Gas, now Puget Sound 25 Energy, and we're learning quite a bit from 00037 1 their experience implementing it. 2 I'm opti