COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES TESTIMONY OF KAREN L. ZINK D.P.U SUBMITTED ON BEHALF OF THE BERKSHIRE GAS COMPANY

Transcription

1 COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES TESTIMONY OF KAREN L. ZINK D.P.U. - 0 SUBMITTED ON BEHALF OF THE BERKSHIRE GAS COMPANY MAY, 0

2 TABLE OF CONTENTS I. INTRODUCTION AND QUALIFICATIONS... II. OVERVIEW OF CASE... III. OVERVIEW OF THE COMPANY AND ITS STRUCTURE... IV. NEED FOR RATE RELIEF... 0 V. THE COMPANY S PROPOSED ARM... VI. BERKSHIRE IS PROPOSING SEVERAL RATE DESIGN ENHANCEMENTS... VII. CONCLUSION... i

3 Page of I. INTRODUCTION AND QUALIFICATIONS Q. Please state your name and business address. A. My name is Karen L. Zink and my business address is Cheshire Road, Pittsfield, MA 00. Q. By whom are you employed and in what capacity? A. I am the President and Chief Operating Officer of ( Berkshire or the Company ). Q. What are your responsibilities? A. I have responsibility for all aspects of Berkshire s operations. In my earlier positions, I had more direct responsibility for marketing, rates, gas supply, transportation services, demand-side management programs, and long-range strategic planning and forecasting. Q. Please describe your educational and business background. A. I graduated from Central Connecticut State University in with a Bachelor of Science degree in Finance and from Western New England University in with a Masters of Business Administration. I have held several positions with Berkshire including Supervisor of Financial Services, Supervisor of Planning, Manager of Rates and Planning, Director of Rates, Regulation and Resource Planning and Vice President. I have been the President of Berkshire since May 00. Q. Have you previously testified before the Department or other regulatory agencies? A. I have extensive experience as a witness in Massachusetts testifying before the Department. I testified as a witness in Berkshire s last three base rate cases regarding rate design, revenue and weather normalization and, in the most recent

4 Page of 0 case, I testified in support of a ten-year performance-based rate plan (D.P.U. 0-, D.P.U. -0, and D.T.E. 0-). Further, I actively participated in the Massachusetts Gas Collaborative effort in developing model terms and conditions pursuant to D.T.E. - and D.T.E. 00-, and sponsored Berkshire s unbundled rate initiative in D.T.E. -. I have testified as a witness in Berkshire s requests for approval: of an LNG supply contract (D.T.E. -0); Forecast and Supply Plans (D.T.E. - and D.T.E. 0-); seasonal cost of gas adjustment revisions (D.T.E. 0-0); a Canadian supply contract with EnCana (D.T.E. 0-); a gas supply contract with BP Energy (D.T.E. 0-); and an alliance arrangement between BP 0 Energy and the Energy East Corporation gas distribution companies, including II. Berkshire (D.T.E. 0-, D.T.E. 0- and D.T.E. 0-). I have also testified before the New Hampshire Public Utilities Commission in support of a previously-affiliated utility. OVERVIEW OF CASE 0 Q. What is the purpose of your testimony? A. I am appearing in this proceeding as the Company s principal policy witness. Specifically, I shall provide an overview of the Company and its operations and, in particular, a number of enhancements we have implemented in order to enhance the safety, reliability and efficiency of the Company s operations. Some aspects of these measures are also described in the testimony of other witnesses. I will provide an overview of the Company s filing in this proceeding which begins with a summary of the Company s most recent rate plan and how the Company effectively and successfully implemented such plan. Finally, I will describe a number of ratemaking enhancements proposed by the Company. I note that I am also co-sponsoring

5 Page of 0 separate prepared testimony with Mr. Therrien and Dr. Rauch describing Berkshire s proposed Alternative Rate Mechanism or ARM plan and the reasons that such plan is needed to facilitate Berkshire s continuing provision of safe and reliable service without the need for repeated base rate cases. summarized in this testimony. The benefits of the ARM are III. OVERVIEW OF THE COMPANY AND ITS STRUCTURE 0 0 Q. Please describe and its business. A. was incorporated in. In the Company acquired substantially all of the assets of the Greenfield Gas Light Company, which then became a part of. During the period between and the Company extended its service area to Hatfield, Whately, Amherst and Great Barrington. The Company further extended its service area in 000 to include Sunderland, Massachusetts. Today, Berkshire serves approximately 0,000 customers in twenty municipalities in two, non-contiguous divisions in western Massachusetts. Berkshire is served off a single interstate natural gas pipeline system, with most service off of laterals to the main line. Berkshire provides peaking service through L.P. and LNG facilities, several of which are older and, as described in Mr. Grande s testimony, are in need of capital upgrades in order to maintain safe and reliable operations. Berkshire s customer base is.% residential and.% commercial or industrial. Berkshire implements a wide range of energy efficiency programs and has long been a leader in load management, providing curtailable service for many years in order to avoid or defer capital investments and to employ its distribution system most efficiently for the benefit of customers.

6 Page of 0 0 In the Company consolidated its Berkshire County operations with the construction of its office building at Cheshire Road, Pittsfield. The Company now serves its customers from this centrally located office and service center in Pittsfield and also from efficient, satellite facilities in Greenfield and Adams. The Cheshire Road facility recently completed a long-needed renovation (for much of the building, the first renovation in nearly 0 years) and a new facility in Adams was purchased in 0 to centralize meter services and northern Berkshire operations for greater efficiency and responsiveness. Berkshire has been involved in several strategic transactions over the past two decades: 0 On September, 000 Berkshire became a wholly-owned subsidiary of Energy East Corporation ( EEC ). Thereafter, some of Berkshire s operations were consolidated or coordinated with gas utility affiliates in Connecticut, securing substantial efficiencies and savings. On June, 00, EEC was acquired by Iberdrola S.A. Berkshire continued to work closely with its Connecticut affiliates as well as with Iberdrola gas utilities in other states securing further efficiency benefits for customers. On November, 00, Berkshire and its Connecticut affiliates were acquired by UIL Holdings Corporation ( UIL Holdings ), the Connecticut-based parent of United Illuminating Company. Again, the transaction was an opportunity for the further adoption of best practices.

7 Page of 0 Finally, in December 0, pursuant to a settlement agreement approved in D.P.U. -, a transaction was completed whereby UIL was acquired by Iberdrola USA Networks, Inc. ( Networks ), a subsidiary of Iberdrola, S.A. and Berkshire became an indirect and wholly-owned subsidiary of Networks. The settlement agreement 0 included a commitment to avoid or defer a base rate case for a specified period, which limitation has passed, and for the application of credit payments to customers over two winter periods which have been completed. Q. Are there any unusual operational constraints facing the Company? A. Yes, due to the full subscription of a portion of the interstate pipeline system and similar concerns on portions of the Company s distribution system, it was necessary to declare a moratorium on the addition of incremental natural gas distribution service in the Company s Eastern Division. Later in my testimony I will provide more background on the need for the moratorium and the implications thereof in terms of ratemaking. Importantly, recent operational experience has confirmed the merits of the declaration in terms of continuing to provide safe and reliable service.

8 Page of 0 Q. Please describe the Company s most recent history in terms of base rate proceedings. A. The Company s most recent rate proceedings were as follows: D.P.U./D.T.E. # Filing Date Order Date 0- //00 //00-0 // // 0- //0 /0/0 - // // - // 0// 0 // // 0 0// /0/ 0 // // In D.T.E. 0-, the Company s most recent rate case, Berkshire implemented a Price Cap Mechanism Plan (the PCM Plan ) which set new distribution cast off rates and then enabled the Company to adjust its rates each year by the rate of inflation less a one percent productivity offset, implemented after a -month base rate freeze. Exogenous costs could be considered and overall service quality measures had to be met. The PCM Plan was in place for 0 years and allowed for a 0 mid-period review after five years. Each September, beginning in 00, the Company adjusted its distribution rates pursuant to the PCM Plan. In fact, on September, 00, distribution rates were reduced by 0.% because inflation in the prior year had been at a rate of less than one percent. Finally, on September, 0, the Company increased its distribution rates for the final time pursuant to the PCM Plan. During the term of the PCM Plan and through 0, overall inflation increased nearly % while distribution rates were increased by only.% in

9 Page of 0 aggregate, demonstrating the overall rate stability and the PCM Plan s substantial benefits to customers. The Company also experienced customer growth that further enabled the Company to avoid a base rate filing even after the expiration of the PCM Plan. Managing the business consistent with the PCM Plan enabled the Company to avoid another base rate filing until this time. Q. Was the PCM Plan beneficial? A. Berkshire believes that both customers and the Company benefitted by the operation of the PCM Plan. Berkshire continued to provide reliable, safe and responsive 0 service while customers enjoyed substantial rate stability. The substantial costs of a base rate case were also avoided. During the term of the PCM Plan, Berkshire satisfied all relevant service quality benchmarks. Berkshire also believes that customers appreciated that the PCM Plan provided regular and understandable rate adjustments at a rate slightly less than inflation. Further, during this time, the 0 Company continued to meet the needs of the communities it serves through charitable contributions and the development of a successful arrearage management program that provided support to our most vulnerable customers. Since the program began in 00 the Company has forgiven nearly $. million. Finally, the continuing implementation of energy efficiency programs has helped our customers manage their heating costs through a multitude of efficiency measures and initiatives. Since 00, Berkshire customers have saved over. million therms at a cost of $. million.

10 Page of Q. Please provide a summary overview of the Company s rate proposal and supporting testimony. A. There are three main elements to the Company s filing. First, in light of our current total revenue deficiency, the Company is presenting support for an increase to the Company s base rates in the form of a traditional cost of service analysis. The cost of service analysis reflects the best available information, including the application of recent changes in the federal tax structure. The Company will also implement a previously described plan to ensure that customers receive the full benefit of the recent tax change. The Company s proposed revenue deficiency of $. million will be offset by the reallocation or transfer of approximately $. million currently recovered through other established rate factors resulting in a net increase of $. million. Second, we are proposing a two phase ARM: (i) the first phase will be implemented pursuant to an update to test year-end rate base to be submitted later during this case in order to reflect certain special safety and reliability investments to be completed in 0; and (ii) the second phase will be implemented pursuant to a series of distribution rate adjustments governed by a proposed formula consistent with Department precedent that will ensure efficiency and rate predictability benefits for our customers for a period of up to five years. The ARM formula will be employed to adjust rates beginning in 00 based upon inflation, a productivity offset and a special factor based upon needed safety and reliability investments to be completed in 0. The ARM will enable the Company to fund several necessary safety and reliability investments described by Mr. Grande without the need for another costly and burdensome rate case. Absent the adoption of the ARM, the Company will need to file at least a second rate case essentially immediately after the completion of this

11 Page of proceeding (and another rate case might immediately follow upon that latter case). Third, the Company is proposing tariffs that: reflect our current revenue requirement; implement the ARM and address several additional rate design matters that are necessary and appropriate given more recent Department directives (such as revenue decoupling, moving certain tracker dollars from the LDAF to base rates, and other related matters); and adjust relevant charges and cost allocations given the length of time since our most recent base rate filing. We have worked diligently to ensure that our proposals are consistent with well-established Department policies and precedent. Q. What other witnesses are testifying on behalf of the Company in support of its filing? A. In addition to me, the following witnesses will testify on behalf of the Company: (a) Daniel S. Dane, Vice President, Concentric Energy Advisors (CEA) and Adam B. Danner, Director of General Accounting and Financial Reporting for UIL Holdings Corporation ( UIL ), who will address a variety of matters relating to the establishment of Berkshire s revenue requirements for use in rate setting as well as planned procedures to ensure that our customers secure the full benefit of the recent federal tax change; (b) David M. Grande, Director of Gas Engineering and System Operations, describing capital investments subsequent to the most recent base rate case as well as the planned, specialized safety and reliability investments that drive the need for the ARM; (c) Angel Bruno, Vice President Total Rewards of UIL who will address various human resource issues including compensation, benefits and pension expenses which are reflected in the revenue requirement; (d) Steven P. Favuzza, Principal Accounting Officer, Vice President and Controller, UIL, who will

12 Page 0 of 0 0 IV. address certain cost of service issues including shared services costs; (e) John J. Spanos, Senior Vice President of Gannett Fleming Valuation and Rate Consultants, LLC ( Gannett Fleming ), who will address depreciation rates; (f) Harold Walker, Manager Financial Studies of Gannett Fleming who will support gas purchase and operating and maintenance expense lead/lag studies; (g) Ann E. Bulkley, Senior Vice President of CEA, who will address the Company s capital structure allowed rate of return; (h) Gregg Therrien, Assistant Vice President, CEA, who in conjunction with myself and Dr. Jason Rauch, Lead Analyst, Avangrid, Inc., will address several aspects of the ARM; (i) David A. Heintz, Vice President, CEA, who will describe the allocated cost of service study; (j) Melissa F. Bartos, Assistant Vice President, CEA, who will describe the marginal cost study; and (k) Jennifer M. Boucher, Manager of Rates and Regulatory Economics, who, together with Mr. Therrien, will address a variety of fundamental cost of service and rate design issues including revenue decoupling, reconciling mechanisms, weather normalization and special contract adjustments, and other tariff-related matters. NEED FOR RATE RELIEF 0 Q. What factors were considered by the Company in determining that it is appropriate to file a request for rate relief along with an ARM and certain other rate provisions at this time? A. A variety of factors were considered by the Company and I detail them below. As an initial matter, however, I wish to emphasize that I am particularly proud of the effort undertaken by Berkshire to avoid the need for a base rate filing for such a long period. We only elected to make this filing after we had exhausted all other reasonable options to avoid a rate case.

13 Page of 0 Indeed, as described earlier, our management has operated under a price cap mechanism since 00 and has worked hard to secure benefits for our customers in terms of rate stability while continuing to provide safe, economic, reliable and responsive service. In order to achieve these goals, Berkshire has implemented numerous important measures to achieve greater efficiency and to defer the need for a new rate filing. For example: 0 An overall reduction to the number of Company employees; Reshaping health care benefits including increasing employee contributions and eliminating defined contribution pension plans; Implementation of technologies to reduce costs and/or improve levels of service; and Greater reliance on centralized and shared services activities. 0 Despite these efforts, however, a number of factors have led to the conclusion that after nearly years a rate filing is necessary and the presentation of a comprehensive ARM plan is appropriate. The ARM will position the Company to continue to provide high quality service and complete important safety and reliability investments without the need for frequent, continual and costly base rate cases. Q. Please summarize the investments Berkshire has made in rate base since its last base rate proceeding. A. The Company has made substantial investment in plant since our last base rate proceeding. This investment was necessary in order to maintain safe, reliable and efficient service. Since our last rate proceeding, we have installed in excess of $00 million of gross plant additions, a substantial figure given the total amount of net rate base reflected in our last rate decision was only approximately $. million. Mr.

14 Page of 0 Grande s testimony describes these plant improvements and the Company s effective management of such capital investments. Q. Can you describe some of the historical and planned rate base investments in more detail? A. Certainly. The following is a high level summary of various investments and initiatives that Berkshire has made or pursued since December, 000: 0 0 New Business Investments including major investments to serve the requirements of larger customers while also securing benefits for all of our other customers. Continuing investments in reliability and security, including restoration of an L.P. facility in Greenfield. Security Upgrades and continuing investments in this area. Implementation of upgraded and coordinated information management systems. Building renovation and new Adams facility purchase to enhance efficiency. Continuing implementation of a 0-year plan to replace certain leakprone mains and service lines. Continuing implementation and expansion of nation-leading energy efficiency programs. Enhancements to operating plans and initiating responses to new legislative or regulatory requirements, including those affecting the environment.

15 Page of 0 Mr. Grande s testimony also describes certain planned investments to be completed in 0 and 0 at the Company s peaking facilities. These 0 investments are needed to maintain safe and reliable service. The Company had sought to defer these investments because a previously planned pipeline project might have enabled the Company to retire these same facilities. These investments are unusual and substantial and, absent the adoption of the ARM, will drive the need for immediate and successive rate cases. Q. What other factors did you consider in terms of filing a rate case? A. A number of other factors have affected the Company s financial condition. Despite our substantial efforts, as with other companies, our operating and maintenance costs have increased since our last test year (ending December, 000). As noted 0 previously, we have experienced CUMULATIVE inflation of approximately % percent since the Company s last rate order. This inflationary pressure has affected essentially all of the Company s operating costs. For example, we have negotiated several union contracts for our union employees and sought to compensate our nonunion employees fairly so that we could attract and retain employees necessary to the provision of safe, reliable and economic service. Costs such as insurance and health care for our employees have gone up at levels above inflation even though we have increased the required contribution from our employees and aggressively sought to maintain these costs. Property tax payment requirements have increased and may increase substantially more. A number of other safety, environmental and reliability requirements have added to our costs. The magnitude of certain investment requirements have also changed dramatically since the Company s last base rate case, i.e., cybersecurity was not a comparable expense in 000. Thus,

16 Page of 0 while we have pursued a comprehensive strategy to maintain low costs, over time our operating costs have increased. Another factor that has affected our earnings is that customer usage is down. This is, in part, based upon the results of our highly effective energy efficiency programs as described earlier. Another factor has been a change in historical weather. Our current rates were set based upon a 0-year 0 average of temperature from Recent weather has been substantially warmer. Our new rates will reflect more current weather data and also a revenue decoupling proposal which will operate to enhance and stabilize our rate design. All other Massachusetts gas companies already have established decoupled rates pursuant to a prior directive of the Department. Decoupled rates are intended to promote still greater energy efficiency investments. Q. Has the Company been able to increase revenues through customer growth? A. For a time, some customer growth with related revenues helped the Company avoid a rate case. More recently, we have experienced customer growth of less than.0% annually. This low growth rate is consistent with recent reports on the findings of the 00 United States census that showed a negative growth rate for population in Berkshire County. This lack of growth opportunities is a substantial driver of the need for the ARM and related rate design proposals. Absent such rate features, the 0 Company could likely find itself in a pattern of continual base rate cases. Q. What has happened more recently in terms of growth? A. Two important growth-related events occurred in recent years. First, # heating oil prices have dropped resulting in more parity between oil and natural gas prices. Thus, there has been reduced interest in customer conversion. Second, and more important, the Company was forced to declare a moratorium in its so-called Eastern

17 Page of 0 0 Division in December 0 for the towns of Deerfield, Greenfield, Sunderland, and Turners Falls and then, in March 0, for the remainder of the Division including the towns of Amherst, Hadley, Hatfield and Whately. This moratorium means that no incremental customer or revenue growth is available in the Eastern Division. Q. Why did the Company declare a moratorium in the Eastern Division? A. It was necessary for the Company to declare a moratorium for incremental load additions, including new customers as well as incremental load from existing customers, as a result of both distribution infrastructure constraints and delivery capacity limitations. The Company determined that it was necessary to implement policies precluding the provision of service to new load in order to protect the public health and safety by maintaining safe and reliable service to its existing customers. Q. Please describe the analytical processes followed by the Company to respond to the moratorium. A. Berkshire has worked with a range of consultants and engineers to identify and evaluate a wide-range of feasible alternatives. This process has narrowed the range of options that would meet the Company s requirements in order to serve incremental demand. The feasible options are, however, very expensive and some involve significant permitting, supply and economic challenges. Should the Company 0 ultimately develop a resource plan to address the moratorium, it may be necessary and appropriate to terminate the ARM and present a refined rate plan or, alternatively, treat such investment as an exogenous cost that could be reflected in a rate adjustment pursuant to the terms of the ARM.

18 Page of Q. Will the moratorium have any impact on rate design? A. We believe that it should. With no growth in the Eastern Division and anemic growth in Berkshire County, the Company is in a somewhat analogous position to certain Massachusetts electric utilities which have adopted a somewhat different form of decoupling with no permitted revenue growth opportunities and all facing major capital investment requirements. Berkshire will be in a difficult position to complete and finance necessary investments needed in order to maintain safe and reliable service. The Company s GSEP alone, while helpful, will not support these necessary investments in areas beyond replacing leak-prone infrastructure. For this reason, Berkshire has proposed the ARM which will provide for future rate adjustments that allow the Company to continue to safely and reliably operate its business and commit to stay out of another base rate filing for five years. Absent the approval of the ARM, the Company would not be able to agree to defer a future filing for rate relief. The Company has proposed certain capital and property tax rate mechanisms as an alternative to the ARM which are intended to help defer the need for a subsequent rate case; however, while this alternative may help to delay the need for a case for some time it is not sufficient to support a formal commitment to defer a filing for a rate case. Q. Please summarize the need for an adjustment to the Company s base rates. A. After nearly years since Berkshire has made a base rate filing, the Company s earnings are clearly insufficient: our actual rate of return for 0 was.% which is less than the 0.% return allowed in our last rate proceeding and does not accurately reflect the Company s actual financial condition as the rate of return was inflated by a one time accounting adjustment. Our returns in 0 and 0 were

19 Page of 0 0.% and.%, respectively. Some aspect of our reduced earnings is attributable to warmer than normal weather. However, since our last rate case, Berkshire has invested millions of dollars in plant in order to serve customers. We have faced increased costs in operating and maintaining our system. To address the Company s net revenue deficiency of $. million, in this case we are proposing updated base rates based upon detailed information regarding our current cost of service. In addition, as described in the joint testimony of me, Mr. Therrien and Dr. Rauch, we are proposing a two phase ARM that will provide stability in prices for the benefit of customers for up to five years and support needed safety and reliability investments without further rate cases. Finally, we propose to adopt several rate mechanisms employed by all other Massachusetts gas companies, including revenue decoupling. V. THE COMPANY S PROPOSED ARM Q. Please describe the Alternative Rate Mechanism being proposed by the Company. A. The principal components of the ARM include: 0 An adjustment to rate base to be submitted later during this proceeding to supplement test year rate based in order to reflect the completion of certain safety and reliability investments planned for later in 0. Starting in 00, an annual rate adjustment based upon inflation plus a productivity offset or an x factor and a one-time k factor to reflect safety and reliability investments to be completed in 0. Available consumer dividend and exogenous cost adjustments (both positive and negative).

20 Page of 0 A commitment to provide a proposal for appropriate customer-related benchmarks in line with the Eversource rate plan. Five-year term of the plan with the right to file a rate case based upon a 0 test year and potential plan adjustments or termination for certain major investments Absent all aspects of the ARM and capital investment adjustments, the Company could not commit to not filing another rate case for five years. Q. Please describe the benefits of the Company's proposed ARM. A. The Company shares the Department's view that a well-designed rate plan, like the one presented in this filing, can be more likely than current regulation to advance the Department s traditional goals of safe, reliable and least cost service and to promote the objectives of economic efficiency, cost control, lower rates and reduced administrative burden in regulation. The ARM may also provide enhanced incentives for efficiency and may help to promote the important public policy and clean energy goals. The ARM provides customers with rate stability and predictability (a concern we have also addressed in our rate design). The design of the ARM will reduce administrative burdens and expense for the Department, the Company and all interested parties. We anticipate that our annual filings will typically require only a comparatively short and straight-forward review to determine compliance with the ARM. For Berkshire, we believe the ARM, as designed, provides incentives that reinforce and advance our long-standing corporate goals of being a safe, reliable and low-cost distributor of natural gas. The Company will be accountable for maintaining efficient operations and will absorb certain risks long borne by our customers under

21 Page of 0 VI. traditional cost of service ratemaking. In sum, Berkshire's ARM is comprehensive, straight-forward and appropriate. BERKSHIRE IS PROPOSING SEVERAL RATE DESIGN ENHANCEMENTS Q. Please address some of the other rate design proposals of the Company. A. The Company is proposing certain rate design enhancements to be consistent with all other LDCs in Massachusetts. Specifically, Berkshire will request: 0 Decoupled Rates PBOP Tracker Continuation of existing reconciling mechanisms including the GSEP and RAAF VII. Increasing the established low-income discount to % The rate design proposals will be addressed in the joint testimony of Ms. Boucher and Mr. Therrien. CONCLUSION 0 Q. Please summarize the importance of Berkshire s proposed filing for the Company and its customers. A. After operating under the PCM Plan which expired on February, 0, the Company is proposing to update its base rates to reflect the current revenue deficiency primarily resulting from (a) significant historical investments in rate base, (b) increased costs in operations and maintenance, and (c) minimal recent growth. Working from the foundation of just and reasonable new base rates, the Company is proposing an ARM that provides rate stability for customers for up five years and will facilitate the major, needed investments in safety, reliability and environmental responsiveness without the need for frequent base rate cases. We believe the

22 Page 0 of 0 Company s proposal in this case appropriately balances the needs of our customers, shareholders and employees in a manner that is consistent with the Department s policy goals. Q. Does this conclude your testimony? A. Yes, it does.