STATE OF VERMONT PUBLIC UTILITY COMMISSION ) ) ) ) PREFILED TESTIMONY OF LAUREN HAMMER ON BEHALF OF VERMONT GAS SYSTEMS, INC.

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1 STATE OF VERMONT PUBLIC UTILITY COMMISSION Petition of Vermont Gas Systems, Inc. for change in rates, and for use of the System Reliability and Expansion Fund in connection therewith ) ) ) ) PREFILED TESTIMONY OF LAUREN HAMMER ON BEHALF OF VERMONT GAS SYSTEMS, INC. SUMMARY OF TESTIMONY Ms. Hammer s testimony supports most aspects of the Company s cost of service and describes many aspects in detail. Additionally, Ms. Hammer sponsors several key exhibits listed below. Exhibit Petitioner LH- Exhibit Petitioner LH- Exhibit Petitioner LH- Cost of Service Determination of Firm Non-Gas Rate Change Index to the Cost of Service

2 PREFILED TESTIMONY OF LAUREN HAMMER ON BEHALF OF VERMONT GAS SYSTEMS, INC. Prefiled Testimony of Lauren Hammer Page of Q. Please state your name, occupation, and business address. A. My name is Lauren Hammer. I am the Rates and Regulatory Analyst at Vermont Gas Systems, Inc. ( VGS, Vermont Gas or the Company ). 0 Q. Please describe your educational background and pertinent professional experience. A. I have been the Rates and Regulatory Analyst since September, 0. Prior to my current position, I held the positions of Gas Controller and Gas Control Coordinator in the Gas Control and Gas Supply Department since October, 0 when I first began working at VGS. I received my Bachelor s Degree in Mathematics from the State University of New York at Albany in 00 and my Master of Arts in Education with Teaching from Alliant International University in 00. I am currently enrolled at Champlain College, pursuing a Bachelor s Degree in Accounting. Q. Have you previously testified before the Vermont Public Utility Commission ( Commission or PUC )? A. Yes. I provided testimony on behalf of the Company in Case No. --INV. 0 Q. What is the purpose of your testimony? A. My testimony, along with that of Ms. Simollardes, Mr. St. Hilaire, Ms. Kean and Mr. Lawliss, describes the Company s request for a.% rate reduction and use of $. million in

3 Page of System Expansion and Reliability Funds ( SERF ). The purpose of my testimony is to explain the process for calculating the Company s rates and explain the basis for relevant adjustments to the cost of service ( COS ). 0 Q. Please describe the Company s approach to developing this COS. A. We approached this COS with several objectives in mind. First, maintaining stable and affordable rates. Next, ensuring we honor the commitments we made to customers and regulators in prior proceedings including the Memoranda of Understanding ( MOU ) in Docket Nos. 0, 0, and Case No. --INV. We also have incorporated lessons learned from our last two rate proceedings and have continued and improved upon our supporting documentation. Additionally, we have included where we believe appropriate, recommendations made by the Department of Public Service (the Department ) in prior proceedings. I note that this is the first COS we have filed since the successful upgrade of the accounting system to the new Enterprise Resource Planning ( ERP ) system, effective June, 0. The historic test year ( HTY or Test Year ) in this proceeding is the twelve months ending December, 0. As a result of the conversion, five months of the HTY were under the old accounting system and seven months were under the new ERP system. While both systems use an approach based upon FERC account numbers, some accounts were mapped to different cost centers for better on-going oversight and control. 0

4 Page of 0 0 Q. Please describe the Company s rates and explain the process for calculating appropriate changes to those rates. A. Firm rates are comprised of several components, the daily access, natural gas, and distribution charges, plus a charge to support the Low Income Assistance Program ( LIAP ) and an energy efficiency charge to support the Company s work and responsibilities as an energy efficiency utility ( EEU ). The daily access charge is assessed on each meter on a per day basis regardless of how much natural gas is used by the customer. The natural gas and distribution charges are based on the amount of natural gas that is used by the customer on a monthly basis. The natural gas charge is adjusted on a quarterly basis in order to flow the costs of natural gas to the customer, either up or down, in a timely manner. Currently, gas costs are passed through to VGS customers on a dollar-for-dollar basis, so that customers pay only the actual cost to purchase and transport the gas. Vermont Gas makes this quarterly adjustment to rates pursuant to the Purchase Gas Adjustment ( PGA ) mechanism, which is a rate setting strategy specific to the natural gas charge that was approved by the Commission in Docket as part of VGS s Alternative Regulation Plan ( ARP ) and extended for one year by order of the Commission on August, 0 in Case No. --PET. For many years, the daily access and distribution charges (collectively referred to as base rates ) were changed annually pursuant to the base rate provisions of prior alternative regulation plans. Since October, 0 however the ARP only addressed natural gas costs and base rates have been set in regulatory proceedings outside the framework of ARP. This means that the non-gas component of Vermont Gas s firm rates (the daily access and distribution charges) have been established based on an investigation into the costs the Company incurs

5 Page of providing natural gas service for the benefit of its customers. In this case, Vermont Gas proposes a non-gas rate change of.0%. See Exhibit Petitioner LH-. When combined with the requested change in gas costs of -.%, the resulting overall rate change is a.% decrease. 0 Q. Please describe how the non-gas rate change is determined. A. Non-gas rates are determined by calculating the total non-gas revenue required to meet the COS. These costs include operating and non-operating costs, with adjustments for SERF withdrawals and other income. Accordingly, the central part of establishing non-gas rates is determining the appropriate cost of providing service during the Rate Year, which in this case is the -month period starting October, 0. The COS for the Rate Year is determined by evaluating the costs incurred by the Company in the Test Year and then making appropriate adjustments for anticipated Rate Year costs based on adjustments that are known and measurable with reasonable accuracy. The COS proposed by VGS is based on the Company s actual costs in the Test Year (VGS s most recent fiscal year ending December, 0) and adjustments described herein. See Exhibit Petitioner LH-. 0 Q. Please describe the components of the COS. A. Consistent with past filings of the Company, the COS generally has two major components; operating costs and non-operating costs. Operating costs are those expenses the Company incurs during the Rate Year to operate a safe, reliable system and serve its customers, A portion of the reduction in natural gas charges will be realized by customers in advance of the rate year through the quarterly purchase gas adjustment filings in effect through September, 0.

6 Page of grouped into broad categories, such as Transmission, Distribution, and Sales. Nonoperating costs refer to the costs associated with the Company s rate base. These costs are generally associated with the investments the Company has made to provide service to customers, and the costs related to items such as depreciation expenses, taxes, and recovery of capital costs. The COS for the Rate Year is based upon costs in the Test Year, with adjustments to reflect anticipated changes in the Rate Year. A narrative summary of these costs and adjustments is provided throughout my testimony. 0 0 Q. Please describe the general categories included in the Test Year and Rate Year COS and explain any major adjustments. A. Both the Test Year and Rate Year COS have several general operating expense categories, including transmission, distribution, customer accounts, sales, administration and general, as well as capital-related expenses such as depreciation, property taxes, and cost to finance rate base. First, each general category is adjusted for the Rate Year to reflect union and non-union wage increases for 0 and 0, and to account for a new employee position that was added at the end of the Test Year that will be in place for the whole Rate Year. In addition, the Rate Year is adjusted to account for an increase in anticipated capitalized labor in connection with upgrading the Company s customer information system ( CIS ). This specific investment will be The Company formerly provided a narrative summary of the COS components as part of its annual base rate filings under alternative regulation, however, this practice has been discontinued in this case in order to avoid unnecessary redundancy between the prefiled testimony and the narrative.

7 Page of 0 0 discussed in more detail later in my testimony. Additionally, the COS reflects the removal of 00% of the executive long-term compensation plan ( LTIP ). This is an example where the COS incorporates the Department s recommendation from prior rate cases as the Department advocated that VGS remove LTIP from the COS in last year s rate case. The adjustment to laborrelated accounts is shown on Schedule to Exhibit Petitioner LH-. Schedule to Exhibit Petitioner LH- shows that transmission-related expenses in the Rate Year are reduced from the Test Year to account for non-labor related expenses of approximately $,00. This adjustment reflects normalized expenses from the Test Year which are based on the three-year average of costs associated with Accounts 0 and 0. The Test Year totals for the two accounts were materially higher than the three-year average due to work related to an in-line inspection of a portion of the transmission line and a repair of the North Burlington lateral. Schedule to Exhibit Petitioner LH- addresses distribution related expenses and was only adjusted by the labor-related changes discussed above. Non-labor related distribution expenses in the Test Year are reflective of the Company s -year average for distribution-related expenses and therefore have not been adjusted for the Rate Year. Customer Account expenses are shown on Schedule to Exhibit Petitioner LH-. The only material adjustment here is related to the Company s Bad Debt Reserve, which is adjusted to reflect the -year average of write-offs as applied to the projected Rate Year revenues. This adjustment has been standard practice in the Company s past rate filings and the adjustment in this case is about $0,000, which reflects the -year average of bad debt write-offs as a percent of revenues applied to projected Rate Year revenues. It should be noted that the Test Year had

8 Page of 0 an anomalous one-time adjustment to correct for an over-accrual of bad-debt reserves. Specifically, the Company performed a review of the accounts receivable reserve, and based upon the results of the review and discussion with its auditors, the Company made a one-time adjustment of $,000 to appropriately reduce the reserve. The bad-debt expense reflected in the COS reflects an appropriate level based on Rate Year expectations. The sales expense is reflected on Schedule of Exhibit Petitioner LH-, and shows a decrease from the Test Year to the Rate Year of approximately $,000. Schedule reflects the expenses associated with sales and marketing, as well as the revenues generated from the sales and marketing departments, which include merchandise sales, service contracts, and installation work. These revenues serve to reduce the COS to the benefit of customers. The adjustment to the sales expenses are all related to the change in projected labor expenses. Sales-related labor has increased by approximately $,00, while offsetting revenues have also been adjusted by the average increase in wages on the assumption that Vermont Gas would adjust its hourly rates related to billable activities to reflect the change in labor rates. 0 Q0. Schedule to Exhibit Petitioner LH- details Administrative and General Expenses. Please describe the proposed changes to this schedule. A0. One adjustment to Schedule relates to payroll and benefits. The benefits percentage and how they are applied in this COS are described in more detail later in my testimony. Other adjustments to Schedule include: Computer (Account ): This account has been reduced by approximately $,00 in order to reduce the expenses incurred in the Test Year and accurately reflect what the

9 Page of 0 0 Company anticipates for the Rate Year. During the Test Year, the Company had costs associated with the implementation of its new ERP system. Accordingly, the Company adjusted to remove those costs in the Test Year and reflected a -year average as it is a more accurate reflection of expected expenses. Admin Costs Capitalized and Transferred (Accounts 0 and ): Both of these accounts serve to reduce the COS. Admin Costs capitalized has been adjusted by the average change in wages from the HTY to the Rate Year. Admin Costs Transferred is similarly adjusted, but also includes a correction to remove benefits associated with EEU staff that were incorrectly charged to this account during the HTY. Because the COS does not include EEU salaries it also does not, and should not, include any benefits associated with the EEU. Outside Services Legal and Other (Accounts 0 and ): Consistent with past practice, the Company has adjusted both accounts to reflect -year averages. For this COS, the -year average results in a reduction to the COS. In determining the -year average, the Company first adjusted the account to reflect a non-recurring expense in the test year and removed expenses related to lobbying. Insurance Premiums (Accounts 0 and 0): Insurance premiums for the Rate Year are based on the Company s fiscal year 0 premiums. There is an adjustment for the Rate Year to reflect an expected increase in premiums in fiscal year 0 and, because many of the premiums are paid in Canadian dollars, the adjustment also reflects the current Canadian exchange. Insurance Claims (Accounts and ): Consistent with past practice, both accounts have been adjusted to reflect -year averages.

10 Page 0 of 0 0 DSM Amortization and Expenses (Account 0): To help maintain affordable rates, in Docket 0, the Company proposed and the Commission approved, extending the amortization period for all remaining energy efficiency balances from years to 0 years. This change went into effect as of May, 0. Since the amortization period was changed approximately halfway through the Test Year, the Test Year reflects a higher amortized amount than will be experienced for the Rate Year. This extended amortization is continuing in this COS, and there are no new energy efficiency balances from those reflected in Docket 0. The Company has made an adjustment downward of approximately $, to reflect the amortization of the remaining energy efficiency balances. Miscellaneous General Expense (Account 0): This account reflects the charitable donations the Company makes, and therefore, it has been adjusted to remove it from the Rate Year consistent with past practice. Directors Fees (Account 0): Vermont Gas has adjusted how its Board of Directors will be compensated. It is now an annual flat fee, based upon the role of each Board member, which has changed from the previous compensation plan of a pay per meeting basis and has reevaluated the director s fees. Therefore, an adjustment upward of $0, has been made for the Rate Year. Memberships (Account 0): Consistent with the DPS s recommendation in the last COS, the portion of American Gas Association dues related to lobbying has been removed from the COS.

11 Page of 0 Q. Please describe how employee benefits are included in the COS. A. Employee benefits for the Rate Year have been adjusted downward approximately $,00 from Test Year costs, which can be seen on Schedule and a. Employee benefits are calculated as.0% of payroll, which is based on several factors including federal and state payroll taxes, costs associated with providing employees insurance (workers compensation and medical), employee retirement plan expenses, and employee benefits regarding wellness and safety. The adjustment also reflects the Company s past practice of excluding 0% of the cost of the supplemental executive retirement plan ( SERP ) in its calculation. Further, based on comments and review by the DPS in the last COS, the Company has also made additional downward adjustments related to overhead associated with non-productive time, such as holiday, sick and vacation pay, and transportation on direct capitalized labor. 0 Q. Turning now to non-operating expenses, please describe how they are established in the COS. A. Non-operating costs include things like depreciation, property taxes and recovery of capital costs. They all arise from rate base. The methodology for determining rate base in this COS is essentially unchanged from previous rate proceedings. The COS rate base reflects the -month average from September 0 to September 0 and the balance sheet accounts included essentially mirror the accounts previously included in rates. The starting point for the rate base calculation is the per book account values as of December, 0. These values are then adjusted for changes from January 0 to September 0 with the -month average

12 Page of 0 0 September 0 to September 0 reflected in rate base. The total Rate Year rate base is $ million. The significant adjustments to rate base are described below: Plant-in-Service: The COS reflects an increase of approximately $. million, which includes the extension of the distribution network to towns in Addison County as well as investments in on-going system reliability and customer service as described in more detail in Mr. St. Hilaire s testimony. These investments in plant include the continuation of the build out of Middlebury and Vergennes distribution networks, as well as New Haven, East Middlebury, Bristol, St. George and Monkton (including the required gate station for Monkton), Also included are investments in distribution mains, meters and services related to growth within Vermont Gas s existing service territory, as well as investments related to support the functions of the Company needed to provide safe and reliable service to customers, such as additional protection of the pipeline through the use of cathodic protection, upgrades to existing gate stations, and IT upgrades. As mentioned previously, the Company has planned for an upgrade to its customer information and billing system. This system will bring new options to customers, including new on-line features and mobile billing, and will replace the current CIS, which is over years old and in the near future will no longer be supported by our vendors. The Company has already issued an RFI, and the work is planned to start in June of 0 and go into service in May of 0. CWIP: CWIP has been adjusted to calculate the expected -month average from September 0 through September 0, which results in $. million of CWIP in the Rate Year.

13 Page of 0 0 Inventories and Prepaid Expenses: Except for gas in storage, the adjustments to these accounts reflect the -month average of the Test Year. Gas in storage is adjusted to reflect the average of the Rate Year and captures changes in the value of Vermont Gas s gas in storage inventory. Deferred Charges and Liabilities: These balances reflect the average balance during the Rate Year. Consistent with past practice, the balance of the unamortized Barge Canal amount has been removed from the rate base calculation. Consistent with the MOU in Docket 0, the Company has included in rate base 0% of the cost associated with providing a SERP benefit to certain employees. Working Capital: Working capital has been determined using the same methodology and average day lead/lag as has been reflected in VGS s past rate filings, applied to Rate Year revenues and expenses. Rate Base Deductions: The deductions to rate base include accumulated depreciation, asset retirement obligation, accumulated cost of removal and deferred income taxes, each of which has been adjusted to reflect the -month average during the Rate Year. The asset retirement obligation has adjusted rate base downward by $,000 related to the accretion expense anticipated for the Rate Year while accumulated depreciation is adjusted for the depreciation expense during the Rate Year. The change in deferred taxes requires a bit more explanation and is discussed more fully in Ms. Kean s testimony. At a high level, the change in federal tax law, reducing the federal income tax rate from % to % resulted in a change in deferred taxes and created a regulatory liability, both of which are reflected as reductions to rate base.

14 Page of In aggregate, these rate base deductions reduce rate base by $. million. The detailed rate base is shown on Schedule to Exhibit Petitioner LH-. The rate base amount directly affects the return on rate base (referred to as cost to finance rate base in the COS), depreciation, and property taxes as discussed below. 0 Q. The COS reflects a weighted cost of capital of.% applied to the rate base described above. How was the weighted cost of capital determined? A. The weighted cost of capital is comprised of a 0% equity ratio at a below-market return on equity ( ROE ) of.% as agreed upon in the MOU between the Company and the Department of Public Service in Docket 0. The remaining capital structure is comprised of long-term debt ( LTD ) and short-term debt ( STD ). Vermont Gas currently has $0 million of LTD, at interest rates ranging from.% to.%. The weighted cost of capital reflects the actual interest rates for each outstanding LTD issuance. The remaining capitalization is assumed to be comprised of STD. In the Rate Year, Vermont Gas will have one short-term credit facility that is indexed to the 0-day LIBOR. The interest rate for the STD is based on the current 0- day LIBOR rate of.% plus the basis differential from the credit line of.00% for a total STD cost of.%. 0 Q. Please describe the changes in depreciation expense. A. Depreciation expenses are reflected on Schedule to Exhibit Petitioner LH-. They are calculated based on the anticipated Rate Year plant-in-service and applying the current depreciation rates which are unchanged from the rates used in the COS approved in Case No. -

15 Page of -INV. Depreciation expense, including the amortizations discussed below, in the proposed COS, is $. million more than Test Year values due to both reflecting a full year of ANGP depreciation and the additional depreciation associated with other investments made to provide service to customers. 0 0 Q. Schedule also includes amortization of certain regulatory assets and liabilities. Please describe them. A. Schedule includes the following amortizations: Debt Expense: Debt expense amortization is simply the amortization of costs incurred related to the issuance of long-term debt and will amortize over the life of the loan. Asset Retirement Obligation ( ARO ): As described more fully in Ms. Kean s testimony, the ARO liability results from a change in the ARO calculation subsequent to rates being established in No. --INV. Vermont Gas is returning this over-collection to customers with this COS. Segment : Pursuant to the MOU between Vermont Gas and the Department in Docket No. 0, Vermont Gas may amortize over 0 years, without carrying costs, its regulatory asset related to Segment of ANGP. The Segment regulatory asset reflected a portion of the carrying costs of the first -miles of ANGP referred to as Segment that was put in service in advance of the remainder of ANGP. The amortization on Schedule reflects this agreement Phase : Pursuant to the MOU between Vermont Gas and the Department in Case No. - -INV Vermont Gas may amortize over 0 years, without carrying costs, $,0, of

16 Page of 0 development costs associated with Phase, the so-called Addison-Extension. The amortization on Schedule reflects this agreement. Pension Amortization: As described more fully in Ms. Kean s testimony, this regulatory asset is associated with pension-settlement accounting and is also being amortized over a 0-year period. Barge Canal: The Barge Canal amortization expense relates to Vermont Gas s share of the cleanup of the Pine Street Barge Canal Superfund site located in Burlington, Vermont. The amortization reflects Vermont Gas s actual expenses through December, 0. This amortization has been treated in past proceedings as a regulatory asset, recoverable through rates without carrying costs. Beginning with the FY0 COS, to maintain affordable rates, the Company proposed and the PUC approved, an extended amortization period from 0 years to 0 years of Barge Canal expenses. The Company has continued this practice in the FY0 COS. 0 Q. The COS reflects an increase in property taxes of $. million. Please describe how this adjustment was determined. A. Some background on how property taxes are assessed may be helpful. Vermont Gas is assessed property taxes beginning July of each year based on the plant-in-service as of December from the prior year. Accordingly the property taxes in the HTY reflect months of taxes (January to June, 0) based on plant in service as of December, 0 and months of taxes (July to December, 0) base on plant in service as of December, 0. Due to the timing of the assessment relative to the calculation and payment of property taxes, the Company must make an adjustment to the COS to properly reflect property taxes that

17 Page of 0 will be payable in the Rate Year. Because of the timing of tax assessment relative to tax payment, the Rate Year property taxes will reflect months (October, 0 to June, 0) based on plant in service as of December, 0 and months (July to September, 0) based on plant in service as of December, 0. To determine the appropriate property taxes during this period, the Company first reviewed the most recent property tax bills received, which represent property taxes that will be paid from July 0 to June 0 and are based on plant-inservice as of December, 0. Then using the tax rates from those bills, the Company adjusted those property taxes for the increase in plant-in-service from December, 0 to December, 0 to determine the property taxes that will be incurred on this incremental plant beginning in July 0. Because not all of Vermont Gas s plant is subject to property taxes, Vermont Gas reduced the incremental plant in service amount to.% of the total, representing the historical percentage of the value of taxable plant versus plant-in-service. The final adjustment to property taxes reflects the impact of plant-in-service as of December, 0. That plant will be taxable beginning July 0. The Rate Year COS includes months of these taxes. The property tax calculation is shown on Schedule a to Exhibit Petitioner LH-. 0 Q. Are there any other adjustments to the COS? A. The other adjustments to the COS are described in Ms. Simollardes testimony and Ms. Kean s testimony that deal with deferred taxes related to the change in the federal tax code, SERF withdrawals, amortization of ARO Regulatory Liability, and amortization related to the Pension Settlement Regulatory Asset.

18 Page of Q. Do you have any other comments? A. Yes. In the Company s FY0 COS, Case No. --INV, the Commission staff requested an index of the COS schedules, which was provided in my rebuttal testimony. I believe this was helpful to the Commission staff last year, and have provided information in the same format here as Exhibit Petitioner LH-. Q. Does this conclude your testimony? A. Yes.