COMMISSION In the Matter of the Application) of: ) ) PUGET SOUND ENERGY, INC., For a ) Certificate of Public )DOCKET NOS. UG-971136 Convenience and Necessity ) UG-980228 to Operate a Gas Plant for Hire ) VOLUME 2 in the Designated Areas of ) Pages 7 - 30 Kittitas County. ) ------------------------------- ) A hearing in the above matter was held on March 11, 1998 at 1:35 p.m. at 1300 South Evergreen Park Drive Southwest, Olympia, Washington, before Chairwoman ANNE LEVINSON, Commissioners RICHARD HEMSTAD and WILLIAM R. GILLIS and Administrative Law Judge TERRENCE STAPLETON. The parties were present as follows: THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by ROBERT CEDARBAUM, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504. PUGET SOUND ENERGY, INC., by JAMES VAN NOSTRAND, Attorney at Law, 411 - 108th Avenue Northeast, Bellevue, Washington 98004. THE CITY OF ELLENSBURG, by Terence L. Mundorf, Attorney at Law, Mill Creek Office Park, 16000 Bothell-Everett Highway, Suite 160, Mill Creek, Washington 98012. Cheryl Macdonald, CSR Court Reporter I N D E X WITNESSES: PAGE HEIDELL, WICKWIRE, 14 MCINTOSH, RIEGER EXHIBITS: MARKED ADMITTED (No exhibits marked.) P R O C E E D I N G S JUDGE STAPLETON: This hearing will please come to order. This is a hearing in docket No. UG-971136 in the matter of the application of Puget Sound Energy, Incorporated for a certificate of public convenience and necessity to operate a gas plant for hire in the designated areas of Kittitas County. Today's date is March 11, 1998. This hearing has been set pursuant to due and proper notice. My name is Terrence Stapleton. I will be the administrative law judge assigned to this proceeding on behalf of the Commission. At this time we'll take appearances, please, for the applicant. MR. VAN NOSTRAND: On behalf of applicant Puget Sound Energy, James M. Van Nostrand, 411 - 108th Avenue Northeast, Bellevue, Washington. JUDGE STAPLETON: For Commission staff. MR. CEDARBAUM: Robert Cedarbaum, assistant attorney general. My address is the Heritage Plaza Building, 1400 South Evergreen Park Drive Southwest in Olympia, 98504. JUDGE STAPLETON: For intervenor city of Ellensburg. MR. MUNDORF: Terence L. Mundorf of the law firm Marsh, Mundorf, Pratt and Sullivan, 16000 Bothell-Everett Highway, Mill Creek, Washington. JUDGE STAPLETON: Thank you. We are convened today to receive a stipulation entered into by the three parties to this proceeding. At this time why don't we call forward the witnesses. I will swear them in and then we'll have them ready when the commissioners arrive. MR. VAN NOSTRAND: On behalf of Puget Sound energy Jim Heidell. MR. CEDARBAUM: The witnesses for the Commission staff are Henry McIntosh and Steven Rieger. MR. MUNDORF: On behalf of city of Ellensburg, Richard Wickwire. Whereupon, JAMES HEIDELL, RICHARD WICKWIRE, STEVE RIEGER and HENRY MCINTOSH, having been first duly sworn, were called as witnesses herein and were examined and testified as follows: (Recess.) CHAIRWOMAN LEVINSON: At this time we will reconvene the Commission's open meeting that we recessed this morning to consider two matters, two docket items, UG-971136 and UG-980228. At this time I will turn it over to Terry Stapleton. JUDGE STAPLETON: Thank you. The witnesses have been sworn, so I'm going to call upon Mr. Van Nostrand for the applicant to make a brief opening statement on the purpose of today's hearing. MR. VAN NOSTRAND: Thank you, Your Honor. Good afternoon, Judge Stapleton, Commissioners. We are pleased to be presenting for the Commission's consideration a stipulation agreed on by staff and the company and the city of Ellensburg in this proceeding. Puget Sound Energy filed this application in July of '97 in follow-up to a commitment that was made in the merger proceeding to increase the availability of natural gas throughout the company's service territory in an effort to provide its customers with more energy choices, and the opportunity for increased energy efficiency. When we filed this application we encountered some opposition from the city of Ellensburg who is the existing certificated provider for some portions of the area, and following the filing of testimony in this proceeding we commenced to have settlement discussions with the city of Ellensburg in the hopes of avoiding having to litigate this case in front of the Commission, and we are pleased to report that those settlement discussions were successful and result in a recommendation that the Commission issue certificates for those areas described in the stipulation and as shown in the map included on the stipulation. And we believe accepting those recommendations regarding the certificated areas will allow gas service to be extended to the greatest number of customers on a reasonable time schedule and on reasonable terms. Other elements of the stipulation relate to safety issues and the necessary tariff revisions to accommodate the particular economic circumstances of this project. The company and staff were able to agree upon some additional safety measures in connection with the company's pressure waiver request, and those additional requirements are set forth in Exhibit F to the stipulation. In addition, the company and staff were also able to agree upon the tariff revisions necessary to accommodate the unique economic circumstances of the project, and the company expresses its appreciation to the staff, particularly Hank McIntosh and Steve Rieger, and those who helped them in coming up with those tariff revisions and making the necessary refinements so we could all agree on those particular documents. Today we're prepared to present a panel of witnesses, one from the company, two from the Commission staff, and one from the city of Ellensburg to be able to answer any questions that the commissioners may have regarding the stipulation. Thank you very much. JUDGE STAPLETON: Thank you. I don't know if the commissioners -- all of you know Jamie Van Nostrand who is representing Puget. This is Terry Mundorf who is representing the city of Ellensburg and Bob Cedarbaum you all know who represents Commission staff. Do either of you have anything you want to add to or any preliminary statements you want to make at this point? MR. CEDARBAUM: I just wanted to add two brief points. Mr. Van Nostrand indicated who the staff witnesses are. The staff and I have talked about how to divide up questions that might be directed towards staff, and so the way we've tried to work it is Mr. McIntosh would try to answer questions with respect to economic feasibility of the project and the tariff that's been filed to implement the settlement, and Mr. Rieger would be handling questions on safety and operational matters. At least that's the general framework that we've tried to outline. Of course, any question in other areas we'll just figure out who the appropriate witnesses are to answer that question. The second point is more a technical procedural one. I guess I'm assuming that the Commission even if it approves the settlement, which we're recommending it do, that that won't happen today. The order won't come out today. The tariff, which is in docket UG-980228, currently has a proposed effective date of March 23, 1998 which is prior to the Commission's next open meeting, so if you don't act on the settlement and tariff today, you need to suspend the tariff so that you can then approve it on the consent agenda at the next open meeting. So just from a procedural point of view you need to at least do that with respect to the tariff. JUDGE STAPLETON: Thank you for pointing that out. We were in fact going to raise that issue, and I guess I could ask, I assume, that the company would extend the effective date to March the 26th, the day after the Commission's next regular scheduled open meeting. The Commission does not intend to rule from the bench today. We'll take this under advisement, and I assume that would be an acceptable way to extend this beyond the next open meeting today, and I assume the company would be willing to grant that extension. MR. CEDARBAUM: In that case you wouldn't need to suspend today. You could just take it up on the next agenda. Either alternative works. JUDGE STAPLETON: Will the company be willing to on the record extend the effective date of the proposed tariff from March 23 to March 26? MR. VAN NOSTRAND: Yes, Your Honor. JUDGE STAPLETON: Okay. Questions from the bench. CHIARWOMAN LEVINSON: I wanted to start with Mr. Rieger on the safety issues, if you could give me an overview of what your concerns were and how they've been addressed in this stipulation. MR. RIEGER: My primary concerns with the safety issues of this pipeline is that the company has proposed to build and operate a pipeline that will be operating above 250 pounds pressure within 100 feet of buildings intended for human occupancy. Pertaining to our existing WAC regulations, the company is not allowed to do that unless they do come to us for a waiver. When staff looked at that option we wanted to ensure that if the pipeline were to be built that the safety standards would not be minimized and to decrease the level of safety for those people that may be living in close proximity to this proposed pipeline. The company has assured us as an example that they will be using additional depth of coverage over the pipeline which will help protect the pipe. They will x-ray at least 25 percent of all the wells on a random basis to ensure that the wells and the integrity of the wells are sound and they should not fail. In addition, the company is proposing to use bedding material of sand or similar material to ensure that the pipe and the pipe coating is protected. The company has also proposed to put in pipeline marker signs in such numbers that the location of that pipeline will be adequately marked and people hopefully will not dig into the pipeline and cause third party damage. CHIARWOMAN LEVINSON: My next, second, question I'm not quite sure whom to address it so I will open the floor, if you will, that if the company were to abandon phase 2 would the city of Ellensburg have a right under the stipulation to try to serve any of those customers, or in fact would some other entity have to make application for a certificate to serve them? MR. HEIDELL: Well, I believe under the stipulation that the certificate that we're asking for would include the phase 2 area. So should we have to abandon phase 2 then someone else would have to apply for that certificate. I think the whole challenge of providing gas to the Kittitas Valley is that once -- if we're not able to provide it to the upper valley I would be surprised if anybody could given the infrastructure that we already have in place from phase 1. MR. WICKWIRE: I'm not exactly sure where the boundary between phase 1 and phase 2 is, but the city has never shown an interest, and if it is upper to lower county kind of division, in the past there's not been an interest in extending our area to the upper county. CHIARWOMAN LEVINSON: So what would be the impact on the customers who were already receiving gas service under phase 1 if phase 2 were abandoned? MR. HEIDELL: The phase 1 customers would continue to receive natural gas service at the tariff rates. CHIARWOMAN LEVINSON: And would they have a commensurate responsibility to continue to pay for whatever infrastructure costs have been incurred as far as you had gotten in phase 2? MR. HEIDELL: The way we have designed the tariff is that all customers would be paying the new customer rate, the additional 17 cents per therm for seven years in addition to their initial $200 qualifying payment, and that in addition to the base rate is their obligation, so they're not held -- the lower valley customers are not held accountable for what happens in the upper valley. CHIARWOMAN LEVINSON: I have a couple of more but I'm going to come back. COMMISSIONER HEMSTAD: Nothing. COMMISSIONER GILLIS: Maybe I'll ask Mr. McIntosh this first and others can jump in. Would you just give me a broad description of the financial risk to the existing customers, new customers and shareholders that would result from implementation of this tariff? MR. MCINTOSH: Well, I think currently in the absence of a general rate case, there's no risk to current customers. The risk to -- on this side of the mountains. On the east side there's some risk in that the critical number of initial customers has to meet a target, and so there's some risk of an adjustment in the rate extension period, and the company's investors have some risk that if this fails entirely then this plant will not be used and useful and a rate case would take a dim view of adding to its legitimate rate base. Of course those are issues for general rate proceedings, but that's the characteristic -- those are the regulatory risks for the investor. COMMISSIONER GILLIS: So the risk to the existing customers and shareholders, to the extent they exist, would be appropriately allocated in a future rate case if at all? MR. MCINTOSH: Yes. COMMISSIONER GILLIS: And for the new customers tell me more about -- just describe for me what is their financial risk under this. MR. MCINTOSH: Well, their risk is that -- currently is that they don't know exactly how many years they will pay the new customer rate. We know for sure it will be seven years but it could be eight or nine or ten. There's no -- it's not really reasonable to expect it would be more than that because it would be unreasonable to expect the general rate case to be delayed that long. COMMISSIONER GILLIS: Is it capped in any way, ten or -- MR. MCINTOSH: There's no cap on the number of additional years. COMMISSIONER GILLIS: Did you discuss a cap? MR. MCINTOSH: Yes, we did. Trouble is that there were other alternatives we discussed, too, and this was the most acceptable of the alternatives. It may not be the best but it is acceptable, and the fact that general rate cases tend to equal things out eventually with the filling growth provided, expected, is what we are counting on. COMMISSIONER GILLIS: Well, in the event of a general rate case within the ten year time frame, the customer -- the new customers still don't know what they're signing up for as far as their risk because they don't know what our decision would be. MR. MCINTOSH: Well, that's true. That's true for every ratepayer. COMMISSIONER GILLIS: But I'm interested maybe from the company's standpoint of why you wouldn't be willing to accept a cap in, say, ten years. MR. HEIDELL: Well, I will answer that. I just want to start out with saying that when the customers sign up and sign an initial service agreement they're signing something saying that the new customer rate will be in place for seven years with a maximum of ten years, otherwise we would go back to the customer. So in no way are we asking the customer to sign a blanket approval that we're going to charge you a new customer rate forever. It's a finite amount between seven and ten years. COMMISSIONER GILLIS: So there is a cap? MR. HEIDELL: Well, there's a cap in the service agreement with the customer, and if the company doesn't get the initial number of customers that we anticipate, technically we could go back to all those customers and say, well, you said you wanted gas service and we told you it would be somewhere between seven and ten years and it's really going to be 11 years, are you still interested in receiving natural gas service. So the decision is always with the customer before they sign up. In terms of putting a cap on it, I think it's important to understand what's going on with the new customer rate. When another customer in another part of the service area signs up for gas service they might pay more than an initial $200 qualifying payment. Essentially what we're doing is we're extending out the new customer rate rather than increasing the qualifying payment. So these customers are being treated the same as any other customer in terms of their paying their fair share of their costs. COMMISSIONER GILLIS: I'm still not sure I understand, though, what would be the problem of just simply putting a cap on to make sure that the new customer's risk is limited. MR. HEIDELL: The only risk in my mind of putting the cap on is that if in the initial sign-ups we don't get the threshold number of customers, and we do the math according to the tariff and it came out to 11 years, then the company would be faced with the issue of is it economic to provide gas service in the valley. So it potentially forces a defining moment. COMMISSIONER GILLIS: But it does sound like it's a pretty complicated set of judgments that the customers are going to make in implementing the choice to sign up or not sign up, and a lot of them being I guess potentially householders as well as the business end of it, could you talk a little bit about how you would present the information to them in a way that they're going to be able to understand their risks and what's their recourse if they don't understand their risk? MR. HEIDELL: Well, I will try to. Unfortunately, since I haven't been in the field doing this I can only give you my view of it, and if it isn't satisfactory we can get one of the other potential witnesses of PSE to answer the questions. We have an agreement that was attached to the bench request -- I think it was bench request 8 or 9; I can check the number -- which we go over with the customer to make sure that the customer understands what they're signing up for. Bench request 9. And so on there we go over what the gas usage is, what the anticipated gas usage is and what the commitments are and the type and have the customer sign that disclosure. So it would be incumbent on the sales staff to make sure that the customers fully understand that agreement before they sign. COMMISSIONER GILLIS: Would you consider it appropriate or unreasonable for our staff to just take a look at the materials that are presented to the customer just to make sure, increase our comfort level, that the customers understand the risk fully before it goes into implementation? MR. HEIDELL: We would be glad to share any marketing materials that we use with the staff before we put them out in the field. COMMISSIONER GILLIS: I think that's all I have right now. COMMISSIONER HEMSTAD: I still don't quite understand the mechanics here. Apparently -- well, there's no cap, and I understand your response as to why you need that open ended, but when you have a draft agreement that puts a cap of ten years, is that -- would you use a draft agreement when you go talk to potential customers and then determine whether the pool is sufficiently large but if it's not then you would modify the agreement to maybe make it say 11 years? Is that the point? MR. HEIDELL: Just to clarify, the draft agreement is what we filed with the bench requests. We hadn't come up with a final version. What we bring out to the customer is a final agreement, and should it turn out that under the calculations that the period is longer than ten years we will have to go back to each customer and talk to them about that. COMMISSIONER HEMSTAD: I see, and do it all over? MR. HEIDELL: And do it all over again, a clear motivation to get customers hooked up and have it be less than ten years. COMMISSIONER HEMSTAD: So you will be marketing, describing what you think will be the arrangement of hopefully seven but not to exceed ten years as a period in which they have to make payments and then that's what you would put into effect if you have a sufficient pool? MR. HEIDELL: That's correct. I mean, we clearly hope that will only be seven years. It's just the logistics of going back should it turn out to be eight. COMMISSIONER HEMSTAD: Thank you. CHIARWOMAN LEVINSON: For both the city and for PSE, at what point do you anticipate customers who have not yet received gas service who wish to receive it will begin to be able to receive it? MR. WICKWIRE: The city is in the process of -- will go for a revenue bond this summer. Hopefully we will start construction on the first year of a three-year expansion program which has been approved by the city council. That would be the latest. It would be a three-year program possibly that may be reduced to two years. And this will provide substantial coverage into the areas that are shown on the exhibits. It's a question of a small staff doing a big job. This is increasing our pipe in the ground, our mains, by about 25 percent. So it is substantial. MR. HEIDELL: With all deference to the Commission and the time that they need to consider the issues, we're actually hoping to put a pipe order in next week so we don't miss a mill date and so we would be starting construction this summer and hope to have the first gas service available to the cities of Kittitas and the community of Thorpe as early as late winter of this year, late 1998. COMMISSIONER GILLIS: I wanted to follow up a little bit more on some of the questions I was asking earlier just to probe it a bit more. To the extent I have any concern at all about the stipulation, it's just trying to understand the risks to these new customers and their ability to understand it, but before you implement phase 1 are you going to -- is the goal to make sure that you have enough customers sign up that it's going to be economically feasible within the seven to ten year time frame or will you begin construction without that assurance? MR. HEIDELL: Given our -- the construction schedule and where we are now I think that should we have approval to sell natural gas, then we will go ahead with the pipe order and so we'll be part way committed, and then we'll do an aggressive marketing as soon as we have approval so that we can sort of reach a judgment as to whether to start construction in June. So we'll probably start construction before we fully know the full extent of year one sign-ups. COMMISSIONER GILLIS: I guess the downside scenario that you sign up customers to an agreement and -- early customers to an agreement but never get the critical mass to make it profitable, and for phase 1 do those customers that sign up have any financial obligation or does it go away because the gas service was never implemented? MR. HEIDELL: They have no financial obligation, and this should occur all very quickly also. COMMISSIONER GILLIS: Okay, thank you. JUDGE STAPLETON: Does that include a return of the $200 customer fee with interest? MR. HEIDELL: I don't believe we collect the $200 on their signing the agreement. Not at the time they sign the agreement. JUDGE STAPLETON: Do you have additional questions? CHIARWOMAN LEVINSON: I don't at this time. JUDGE STAPLETON: I would just like to have the company and the city explain briefly where there's overlapping territory and the city is not able to serve a customer at the time that it's ready for service and Puget signs up the customer, does that customer revert over to the city? If so how? What are the dynamics of that particular provision of overlapping? MR. HEIDELL: My understanding is that the purpose of this area is that we're just trying to make gas available as soon as possible to customers. So in the overlap area, for instance, we have the pipeline out there, we'll sign customers up, but when the city extends their mains out there and has the ability to serve them those customers can switch over, can switch over to the city of Ellensburg, and then the stipulation allows for essentially the city compensating PSE for its investment, you know, specific to those customers. MR. WICKWIRE: On a five year basis is the way I understand it. COMMISSIONER HEMSTAD: Well, pursuing that point, so the expectation is that the company will have amortized all of its costs within five years? MR. HEIDELL: For the project, no. It's a calculation based on the incremental cost of the hook- up for the customer, the service line, the meter and attachments to the main. The project costs and the high pressure main is a long-term investment that the company is making. COMMISSIONER HEMSTAD: That's what I was assuming, but if you lay the pipe and then the city takes over, say, in the sixth year you receive no compensation for that, for that capital investment, if I understand the arrangement here? MR. WICKWIRE: That's correct. If there were a thousand dollars invested I'm not sure of the exact formula, but they would be compensated for that and guaranteed a five year margin, I believe, from the time it was installed. MR. HEIDELL: Which would compensate us for the main and the service line, but the cost of the backbone system in the valley we just don't -- would not be covered from those customers. COMMISSIONER HEMSTAD: I see. JUDGE STAPLETON: No further questions? CHIARWOMAN LEVINSON: I have none. JUDGE STAPLETON: Let's be off the record for a moment. (Recess.) JUDGE STAPLETON: Let's be back on the record. The parties are going to prepare an exhibit list, I understand, and you will assign numbers and present that as a joint filing in the case and those exhibits -- shall we just assume that those exhibits are admitted into the record per the prepared exhibit list to be filed at a later date? MR. CEDARBAUM: That's fine. JUDGE STAPLETON: Those exhibits are admitted. MR. CEDARBAUM: Whatever number they are. JUDGE STAPLETON: Let's see. Were there any other procedural events that I was supposed to accomplish before we went off the record? MR. CEDARBAUM: I guess my assumption is with respect to the tariff the Commission is taking no action on it today and then it will be placed on the next agenda assuming that an order comes out prior to that time accepting the stipulation. JUDGE STAPLETON: That's how the Commission would handle it. It would probably go on the -- probably just put it on the no action agenda for March 25 to take effect the following day on the 26th which is the effective date that the tariff has been extended by the company today, and the Commission will have an order entered before March 25. Any other questions from the parties? This hearing is adjourned. Thank you very much. (Hearing adjourned at 2:10 p.m.)