Line No. WITNESS: JEFFREY L. ADAMS Page 1 A. INTRODUCTION. Q. Please state your name and business address. B. PURPOSE

Transcription

1 No. WITNESS: JEFFREY L. ADAMS Page 0 A. INTRODUCTION Q. Please state your name and business address. A. My name is Jeffrey L. Adams. My business address is Fairmont Avenue, Fairmont, West Virginia. Q. Are you the same Jeffrey L. Adams who previously presented direct testimony in this proceeding? A. Yes. B. PURPOSE Q. What is the purpose of your rebuttal testimony in this case? A. The purpose of my rebuttal testimony is to respond to the direct testimony of Consumers Advocate Division (CAD) witnesses Allen and Harris. My rebuttal testimony will cover the following areas: Cash Working Capital Prepaid Gas Uncollectibles Conditions for Sale Correction of CAD Errors Updates to Company Information C. CASH WORKING CAPITAL Q. Does Mountaineer Gas have a need for cash working capital? A. Yes. Like any company, Mountaineer Gas Company ( Company or MGC ) must have access to cash working capital in order to carry out day to day operations

2 No. WITNESS: JEFFREY L. ADAMS Page 0 pending receipt of customer payments for service. Q. Should MGC be allowed to include cash working capital as a component of rate base? A. Yes. As acknowledged by CAD witness Allen, the inclusion of investor- supplied cash working capital in rate base is proper and necessary to allow investors the opportunity to earn a return on all their investments. Q. What change to the Company s lead/lag study does Mr. Allen suggest? A. Mr. Allen has suggested the addition of a check clearing lag in the computation of the lead/lag study. Q. Do you agree with Mr. Allen s changes? A. Yes, if properly calculated. Q. Please explain. A. Mr. Allen has properly calculated the float time based on Company supplied information for revenue receipts and for expenditures paid by check. However, Mr. Allen did not consider the float time for payments made by the Company using wire transfers (EFT) and automatic clearing house transactions (ACH). Q. What impact would the inclusion of the float time for these two methods of payment have on Mr. Allen s calculations? A. The inclusion of the float time for these two payment methods would reduce the check lag from. days to 0. days. Q. Why is the impact so significant? A. The Company is moving from payment by check to electronic payment to the extent possible. The majority of Company expenditures, approximately %, are made by

3 No. WITNESS: JEFFREY L. ADAMS Page 0 wire transfers while the ACH methods represents approximately %. Wire transfers by definition are instantaneous and ACH payments take less than two days to clear. Q. What percentage of expenditures is made using checks? A. Approximately %. Q. Why didn t the Company include the float when it prepared the last lead lag study? A. While it is important to recognize the increase in float for the Company through the use of checks, the benefits are more than offset by payments made using EFT or ACH. Because the overall check clearing float was negligible, the Company chose not to include it. However, should the check clearing float be included, it is important to include all payment methods in determining its impact. Q. Was the CAD aware of the different payment methods used by the Company? A. Yes. CAD data request B- requested the methods of payments used by the Company, and the Company supplied that information. I have attached the CAD data request and the response as exhibit Rebuttal JLA. Q. What is the overall effect of correcting the check clearing lag used by the CAD? A. A properly calculated check clearing lag would be 0. days and, with the inclusion of the revenue clearing lead of. days, would result in a revised cash working capital of $,,0 or an increase to the Company s requested cash working capital of $,. The Company used the formula approach in its filing (as we are permitted to do under Rule of the Tariff Rules). As I indicated in my direct testimony, the formula approach, in this case, actually generated a lower cash working capital allowance when tested against an earlier lead/lag study. In this case,

4 No. WITNESS: JEFFREY L. ADAMS Page 0 if the Company had relied upon a lead/lag study, the requested cash working capital would have been $, higher than under the formula approach. Because the results of the formula approach and the lead/lag study were reasonably close, it was not necessary to go through the time, cost and expense of conducting a lead/lag study. D. PREPAID GAS Q. Does CAD witness Allen make an adjustment to prepaid gas? A. Yes. Mr. Allen removed the entire -month average balance for prepaid gas from rate base. Q. Do you agree with this treatment? A. No. Prepaid gas represents an asset of the Company and is essential to providing utility gas service to our customers. The Company should be afforded the same return on prepaid gas as it earns on other prepaid assets such as prepaid insurance or prepaid outside services. In addition, prepaid gas is similar in nature to storage gas which is included in rate base. Q. Is prepaid gas similar to storage gas? A. Yes, in that both prepaid gas and storage gas are both assets of the Company. Storage gas represents an asset of the Company that is purchased and stored for later use in leased facilities. Typically, storage gas is purchased and injected between May st and October st and is withdrawn from November st through April 0 th to meet the heating season demands of the customers and to capture the price arbitrage between

5 No. WITNESS: JEFFREY L. ADAMS Page summer and winter natural gas prices. Prepaid gas includes any purchase of flowing gas or storage gas that the being stored in some other entities facilities before being released to the Company. Because of certain financial constraints imposed on the Company, the has been required to advance funds prior to shipment of the gas, but once these are funds are advanced the Company has a legal and contractual entitlement to that gas. The Company has expended capital for an asset on which it is entitled to earn a return. Q. After the Company returns to a sound financial footing, will the requirement of prepayment continue? A. The requirement for prepayment may or may not continue at that point. That will depend on the contractual terms the Company secures to acquire gas, but for the present these prepayments are a contractual requirement on the Company. These agreements represents an assets of the Company, and the Company should be allowed to earn a return on these assets, just as it does on other prepaid assets. 0 E. UNCOLLECTIBLES Q. How did CAD treat MGC uncollectibles expense? A. CAD witness Allen is suggesting that MGC uncollectibles expense in the test year is too high and should be adjusted by use of a three-year average. Q. Do you agree? A No. The uncollectibles expense relates to both base rates revenues and purchase gas

6 No. WITNESS: JEFFREY L. ADAMS Page 0 revenues. The recent increase in uncollectibles expense is largely attributable to the increase in purchase gas costs. By using a three-year average of uncollectibles expense, the uncollectibles expense reflects historical gas prices and PGA rates that are not representative of the current experience of the Company. The Company s uncollectibles expense remains at test-year level, or may even increase with declining economic conditions, as long as gas prices remain at the current level. While the uncollectibles expense relates to both base revenues and purchase gas revenues, the Company does not have a mechanism in place to adjust purchase gas revenues for an increase in uncollectibles expense related to purchase gas cost. Presently, the only way the Company can address the uncollectibles expense is through base rates, and should the uncollectibles expense be understated (the effect of Mr. Allen s adjustment), the Company will not sufficiently recover its uncollectibles expense in its cost of service. Q. Is MGC s current uncollectibles expense for 00 above the test year level? A. Yes, MGC uncollectibles expense for 00 has increased to almost $ million, or $0. million above the going level of $. million in the case. This further shows that the Company will not be able to recover its uncollectibles expenses in the rate year (the first full year that the rates are in effect) if the CAD adjustment is used or used without being updated by using more current data. If the same three-year average calculation was made including 00 (which was well below average), 00, and 00, the average uncollectibles expense would still be $. million, or an increase in the current CAD suggested level of almost $. million. Based upon this

7 No. WITNESS: JEFFREY L. ADAMS Page 0 information the CAD adjustment should be discounted, or the minimum level of uncollectibles expense should be established at the going level amount of $. million, or, more appropriately increased to the 00 level of $. million. F. CONDITIONS FOR SALE Q. CAD witness Harris suggested that one condition of the sale should be the extension of the service contract to three years. Has the Company considered this condition? A. Yes. There are two types of services offered in the Transition Services Agreement: transitional and evergreen services. The transitional services are those services offered by Allegheny to the buyer until the buyer is able to provide or otherwise contract for those services. These services do not directly affect the customer, and Allegheny is not interested in extending these services. The evergreen services pertain to the call center and billing. These are services that both the buyer and seller would be interested in extending. Allegheny would consider capping the charges for these services at the current capped level with an appropriately indexed annual escalator for a three year period. G. CORRECTION OF CAD ERRORS Q. Did you find any errors in the calculation or assumption of the testimony and exhibits of the CAD witnesses? A. Yes. The adjustments with errors we have identified so far are: Postage Expense Deferral of External Costs Related to Potential Sale of Gas Business Deferral of other External Costs

8 No. WITNESS: JEFFREY L. ADAMS Page 0 Q. Please explain each of the errors. A. The Company had initially discovered in a review process that postage expense was not being properly allocated to MGC. The Company made the proper adjustment to include this expense in the going level expenses of the case. The CAD has made an adjustment to not only include the 00 going level of postage expense but also to include the 00 postage expense that should have been allocated to MGC. The inclusion of the 00 postage expense of $,0 represents a double count and increases expenses above proper going level amount. The next adjustment listed above titled, Deferral of External Costs Related to Potential Sale of Gas Business, has two issues. First the adjustment of $,0 has been included twice; please see CAD Exhibit RMA- Schedule titled Adjustment to Prior Period Adjustments, the adjustment is listed on both the third and sixth line. Second, the Company has previously removed these costs in Company Adjustment 0. Therefore, the adjustment does not need to be made because it removes costs which have already been removed. The next adjustment with an error listed above is titled To Defer External Costs in the amount of $,. These expenses are related to Monongahela Power and have not been included on the books of MGC. The working papers used by the CAD identified these costs as belonging to MP not MGC. The further reduction in expenses is not necessary since these expenses do not exist on the books of MGC. Q. Do you have any other comments about CAD testimony? A. Yes. The Company has made several updates to the information originally filed in

9 No. WITNESS: JEFFREY L. ADAMS Page the case. These updates were made to specific adjustments identified in Company witness Lampard s testimony. Some of the original adjustments need to be updated since additional information has become available; the Company has replaced the original data with the updated information. CAD should use the correct starting point in order to accurately evaluate the Company s revenue requirement and the proper level of expenses. H. CORRECTIONS OF COMPANY DATA Q. Does the Company have any further corrections or updates to make at this time? A Yes. While preparing information for a Staff data request has discovered a correction that is necessary to properly determine the revenue requirement in this case. Q. Please explain the correction. A. The Company has overstated base revenues in the amount $,. These revenues actually related to PGA revenues and should not be included in base revenues. The Company, in order to correctly present the revenues in case needs to increase PGA revenues, which are removed in Company Adjustment, by $,. This reduces going level operating revenues to $,,. Q. Does this complete your rebuttal testimony in this case? A. Yes, it does.