Chase Tower, Eighth Floor. P.O. Box July 13,2018

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1 STEPTOE JOHNS0 ATTORNEYS AT LAW Chase Tower, Eighth Floor P.O. Box Writer s Contact Information Charleston, WV - (0) - -Telephone (0) -000 (0) -0 Fa kurt.krieger@steptoe-johnson.com wwwseptoe-johnson.com WVSB No. July,0 EEAND DELIVERY Ingrid Ferrell, Executive Secretary Public Service Commission of West Virginia 0 Brooks Street Charleston, West Virginia,- -- RE GENERAL ORDER NO.. In the Matter of the Effects on Utilities of the 0 Tax Cuts and Jobs Act Dear Ms. Ferrell: Enclosed for filing on behalf of Hope Gas, Inc., dba Dominion Energy West Virginia (the Company ), please find the original and copies of the following items: Rebuttal Testimony of Jo Carol Farmer; and 0 Please file the enclosed items and distribute the additional copies to the appropriate parties at the Commission. Also, please date stamp the file copy provided and return it with our messenger. Thank you and please contact me should you have any questions. Sincerely, HOPE GAS, INC., dba DOMINION ENERGY WEST VIRGINIA Kurt L. Krieger Its Counsel Cc: John Auville, Esq. (w/encl.) Tom White, Esq. (wlencl.) Ralph C. Smith (wlencl.) ERRALEX West Virginia 0 Ohio 0 Kentucky 0 Pennsylvania * Texas 0 Colorado &,kg,h*,a k.i.d.,,.d,p.liw b.hi

2 PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON GENERAL ORDER NO.. In the Matter of the Effects on Utilities of the 0 Tax Cuts and Jobs Act REBUTTAL TESTIMONY OF JO CAROL FARMER On behalf of HOPE GAS, INC, dba DOMINION ENERGY WEST VIRGINIA July,0 0

3 Hope Gas, lnc., dba Dominion Ener<g West Virginia Rebuttal Testimony of Jo Carol Farmer 0 Are you the same Jo Carol Farmer who previously submitted direct testimony on behalf of the Company in this docket? Yes. What is the purpose of your rebuttal testimony? The purpose of my rebuttal testimony is to respond to the recommendation in the Commission Staffs Initial and Final Joint Staff Memorandum dated July, 0 in this docket ( Staff Memo ) that a -month negative surcharge be implemented effective August, 0, to return the so-called deferral period - January,, 0 to July I, 0 - current income tax savings under the 0 Federal Tax Act. The Consumer Advocate Division s ( CAD ) witness, Ralph C. Smith, does not make this recommendation with respect to Dominion Energy West Virginia in his prepared direct testimony ( CAD Direct ). Unless I state otherwise, any capitalized terms in my 0 testimony are intended to have the meaning given to them in my direct testimony. GENERAL Does the Staff Memo or the CAD Direct dispute any of the calculations or amounts in your prepared direct testimony or the Company s responses to data requests? NO. Should the Commission implement a same approach for all of its regulated utilities in response to the 0 Federal Tax Act? No. As I testified in my direct testimony and as I believe the Staff Memo also reflects, there may not be a one-size-fits-all approach in addressing the impacts of the 0 Federal Tax Act on the regulated utilities. 0

4 Hope Cas, [ne., dba Dominion Energy West Virginia Rebuttal Testimony of Jo Carol Farmer B. NEGATIVE SURCHARGE What is the recommendation in the Staff Memo with respect to the deferral period? The Staff Memo states at pages -: 0 [Rjegarding the reduction in revenue requirements associated with changes in current income tax expense for the deferral period beginning January, 0, until August, 0, this amount should reduce rates effective August, in the form of a negative surcharge which should be in effect for one year. Mr. Pauley notes Staff wants to reserve the right to true-up these amounts in the utilities and solid waste carriers next base rate proceeding. Do you agree with this Staff Memo recommendation? No, for the reasons set forth in the Company s response filed yesterday, July, to the Commission s four questions and the Staff Memo; however, to the extent a negative surcharge is implemented, I agree with the Staff Memo that it must be subject to a true- Does CAD recommend that the Company implement a negative surcharge for the deferral period? 0 Not with respect to Dominion Energy West Virginia. CAD S witness, Ralph C. Smith, does recommend a negative surcharge for the deferral period amount, or stub period as CAD refers to it, for other larger utilities, but does not make that recommendation with respect to the Company. If a -month negative surcharge for the deferral period is implemented, do you have recommendations as to how the deferral period amount should be calculated and trued-up? 0

5 Hope Cas, /ne., dba Dominion Energy West Virginia Rebuttal Testimony of Jo Carol Farmer 0 0 Yes. First, the purpose of any such negative surcharge requirement is to ensure that no more or no less than the amount of excess tax expense embedded in base rates effective during the deferral period is returned to customers. This deferral period amount should be determined as the base rate reduction that would have otherwise been effective January, 0, applied to actual usage and billing activity during the deferral period. Therefore, the calculation of the actual deferral period amount cannot be known until actual usage and billing activity is known and taken into account upon new base rates going into effect. For example, assuming the deferral period ends on July, 0, the amount deferred based on actual usage and billing activity through July, 0 would not be known by the Company until the first business day of October 0 to allow for the completion of all billing cycles that include consumption through July, 0. Consequently, amortization of the deferral period amount by means of a negative surcharge would have to include a true-up mechanism to ensure that the deferral period amount (reflecting what actually would have been returned to customers through a base rate reduction effective January, 0) and no more or no less is, in fact, what is actually returned to customers through the negative surcharge. If the negative surcharge mechanism is implemented effective August, 0, the mechanism should include a true-up of both the final calculation of the actual deferral period activity and amount and a true-up of negative surcharge period collections. Does the Staff Memo not agree with you that the negative surcharge should be subject to true-up? SO

6 Nope Cas, Inc., dba Dominion Euergy West Virginia Rebuttal Testimony of Jo Carol Farmer The Staff Memo seems to recommend that true-up of the negative surcharge not occur until the Company s next base rate proceeding. I disagree and do not think it is necessary to wait until the next base rate proceeding to true-up the negative surcharge. I agree that the negative surcharge needs trued-up as just testified, but the negative surcharge is for 0 current income tax savings during the deferral period and does not raise the complexities involved with protected and unprotected EDIT calculations and methods for returning EDIT amounts to customers. I see no basis for waiting to true-up the negative surcharge in a base rate proceeding. If a negative surcharge is implemented, it should be trued-up at its termination. In place of implementing a new negative surcharge to return the deferral period amount to the Company s customers, are there any other alternatives? Yes. In the alternative to implementing a new negative surcharge mechanism, subject to true-up, the Company already has a currently effective surcharge mechanism, subject to true-up, being its Pipeline Replacement and Expansion Program ( PEP ) surcharge mechanism, that could be used to implement the return of the deferral period amount. As the Staff Memo (p. ) mentions, the Company s PREP rates are based on the appropriate customer classes and allocators for doing so. If this alternative is adopted, the Company can confer with Staff and CAD on the details of implementation through the Company s PEP. 0 Does this conclude your rebuttal testimony? Yes. 0

7 PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON GENERAL ORDER NO.. In the Matter of the Effects on Utilities of the 0 Tax Cuts and Jobs Act REBUTTAL TESTIMONY OF JAMES GABBERT On behalf of HOPE GAS, INC., dba DOMINION ENERGY WEST VIRGINIA July,0 0

8 Hope Gas, Inc., dba Doniinion Energy West Virginia 0 0 Are you the same James Gabbert who previously submitted direct testimony on behalf of the Company in this docket? Yes, I am. What is the purpose of your rebuttal testimony? The purpose of my rebuttal testimony is to: () offer testimony in further support of the estimated breakout of protected and unprotected EDIT ainouiits; and () offer testimony in support of how to calculate financing costs addressed and recommended in my direct testimony for any early return to customers of unprotected EDIT outside of a base rate proceeding context. Unless I state otherwise, any capitalized terms in my testimony are intended to have the meaning given to them in my direct testimony. GENERAL Does the Commission Staff s Initial and Final Joint Staff Memorandum dated July, 0 in this docket ( Staff Memo ), or the Consumer Advocate Division s ( CAD ) witness, Ralph C. Smith, in his prepared direct testimony ( CAD Direct ) dispute any of the calculations or amounts in your direct testimony or the Company s responses to data requests? No. Does the Staff Memo or CAD Direct dispute the Company s use of ARAM with respect to its protected EDIT? No. Do you agree with the Staff Memo s recommendation with respect to protected and unprotected EDITS? 0

9 Hope Gas, Inc., dba Doininion Energy West Virginia Generally, yes, to the extent the Staff Memo is recomnlending that they should be addressed on a utility-by-utility basis and in a future period in the proper rate-setting context and in compliance with the Normalization Rules. Furthermore, as the Staff 0 Memo and my direct testimony state, the identification and calculation of these EDIT amounts is complex and not yet final. The Staff Memo recommends that the EDIT issues be addressed so that rate reductions can be implemented with respect thereto no later than by January, 00. Do you agree? The Company is not opposed to working with Staff to develop a plan under which the Company will finalize the calculation of its protected and unprotected EDIT amounts, but I believe it is premature to predetermine when rate reductions will occur given the complexity of the issues and, for example, the need to adhere to the Normalization Rules with respect to protected EDIT using ARAM. B. PROTECTED AND UNPROTECTED EDIT AMOUNTS The CAD Direct at page states that the Company has not yet provided a clear breakout of its EDIT between protected and unprotected. Is this correct? No. I provided the best estimates and the most detail available at the time in Exhibit A attached to my direct testimony. However, I can see why the CAD witness may have thought it unclear since the determination of that breakout is complex. I offered 0 testimony to support a breakout of EDIT based upon plant-related and non-plant-related categories at this preliminary stage of the Company's review of the various components of its EDIT. Please explain. 0

10 Hope Gas, IIIC., dba Dominion Energy West Virginia As I testified in my direct testimony and as of the date of that testimony, in total for Dominion Energy West Virginia, the net amount of EDIT at December, 0 is approximately $ million. A regulatory liability for EDIT in the amount of approximately $ million was booked (to reflect the revenue requirement level of EDIT) as well as an offsetting deferred tax asset of $ million. The analysis of plant-related EDIT and non-plant-related EDIT was based on the fact that the Company has historically tracked the ADIT using these classifications. However, the protected versus 0 0 unprotected nature of ADIT balances was not tracked and is not always readily available. If it is plant-related EDIT, will it not also be protected? Not necessarily, there are certain plant-related items that do not meet the definition of protected items subject to the Normalization Rules. Please explain. Since non-plant-related items do not involve accelerated depreciation, they can safely be identified as unprotected. Even though plant-related EDIT consists largely of protected EDIT, there are unprotected, plant-related items that are not easily segregated from all other plant-related EDIT. Additional review and analysis is being conducted on specific issues and classification of EDIT based on the nature of the Normalization Rules. As I testified in my direct testimony, and because of the difficulty in segregating out protected and unprotected, plant-related EDIT, the Company believes that all plant-related EDIT - both protected and unprotected - should follow the same amortization prescribed by the Normalization Rules for the simple reason that its cost-of-service-based rates have historically been based upon such normalization treatment of all plant-related ADIT, 0

11 Hope Gas, Inc., dba Dominion Energy Wesr Virginia With that said, generally, what are your estimates of the Company s protected and unprotected EDIT? I prepared and attached an Exhibit A to my direct testimony setting forth calculations in support of the preliminary, estimated amounts of each. On the first page of that Exhibit A, the far right columns of the first two lines set forth the breakout of plant-related EDIT regulatory liability and non-plant-related EDIT regulatory liability. As set forth on that Exhibit A and as of the date I prepared that Exhibit A, those amounts are as follows: 0 Federal Tax Act Preliminary Regulatory Liability for EDIT Balances Based on December.0 Account Balances 0 TOTAL $,,.00 However, as I just testified, there is a portion of the $ million that very likely will be determined to be plant-related, but unprotected EDIT. Are these amounts final? No, these amounts are preliminary in nature. As I testified in my direct testimony, the year-end EDIT analysis and entries are based on the best available data and estimates available at the time to book our income tax provision and regulatory balances. These amounts include estimated amounts that will be adjusted upon completion of the 0 federal tax return in late 0. In addition, implementation of the 0 Federal Tax Act has raised several technical issues that have yet to be resolved. Therefore, we expect to continue to make adjustments to these EDIT balances throughout 0. 0

12 General Order No.. I Hope Gas, Inc., dba Dominion Etiergy West Virginia What method should be employed to return protected, plant-related EDIT to the Company s customers? 0 0 With respect to protected, plant-related EDIT, the 0 Federal Tax Act continues to mandate application of the Normalization Rules. The Normalization Rules require that the amortization of protected, plant-related EDIT be used to reduce customer rates over the remaining lives of the related property according to the ARAM. The Staff Memo does not dispute this and the CAD Direct agrees with the Company on this issue. As I stated in my direct testimony, the Company has already begun amortization of the plantrelated EDIT, effective January, 0, in accordance with the Normalization Rules. However, to assure its compliance with the Commission s order dated January, 0 in this docket, the Company has also re-deferred this amortization of plant-related EDIT pending further direction from the Commission. The Company recommends that the redeferral of plant-related EDIT be discontinued since it is not necessary in order to compute the appropriate amounts to be considered in a future rate proceeding. In order to remain compliant with the Normalization Rules and ARAM, I recommend that protected, plant-related EDIT, including any corrections, updates and true-ups thereto, be considered in the context of a future rate proceeding. CAD S witness agrees with this approach and this approach is consistent with the Staff Memo. Can you elaborate further on why the re-deferral is unnecessary? As I testified in my direct testimony, due to the Commission s Order, the Company is redeferring its protected EDIT amortization (which began effective January, 0) as a separate regulatory liability. However, as I testified, such re-deferral is not necessary. Consequently, the Company proposes that the separate regulatory liability established to 0

13 Nope Gas, [ne., dba Dominion Energy West Virginia accumulate the ongoing EDIT amortization be terminated, which would allow the Company s financial records to reflect the appropriate level of EDIT amortization as an offset to annual expenses to be reflected in future rates. What method should be employed to return unprotected, plant-related EDIT to the Company s customers? Recall that some portion of the estimated $ million of plant-related EDIT very likely includes some unprotected, plant-related EDIT because they do not meet the definition of protected items subject to the Normalization Rules. Since the Company s cost-of- 0 service-based rates have historically been based upon the normalization treatment of all plant-related ADIT and the protected versus unprotected classification of plant-related items are not easily segregated, the Company recommends that the Company s unprotected, plant-related EDIT be returned to customers using the same niethodology applied to the Company s protected EDIT; that is, using ARAM. What method should be employed to return unprotected, non-plant-related EDIT to the Company s customers? The Company recognizes that Normalization Rules do not apply to the return of the nonplant-related, unprotected EDIT regulatory liability, which, at this time, the Company estimates to be approximately $ million. As I testified in my direct testimony, each of 0 the non-plant-related unprotected EDIT items is related to an ADIT item. The specific ADIT item may not reverse according to a prescribed pattern but is awaiting specific events such as the actual payment of cash rather than the accrual of a future expense. As I stated in my direct testimony, were the amount of non-plant-related, unprotected EDIT known with certainty, a straight-line amortization method could be applied over an 0

14 Hope Cas, Inc., dba Dominion Energy West Virginia 0 appropriate time period. Given the long-term nature of the utility business and the benefits of rate stabilization, the Company recommends an amortization period for kvlown unprotected EDIT of at least 0 years. EDIT and ADIT are still a form of cost free capital that, once incorporated into rates, will need to be replaced by other, non-cost free forms of capital such as long-term debt and equity. However, as I testified, at this time the Company is not absolutely certain as to the exact amounts of protected and unprotected plant-related EDIT. What do the Staff Memo and CAD Direct recommend with respect to the Company s unprotected EDIT? In practical terms, believe both are recommending the same approach with respect to the Company s unprotected EDIT. The CAD Direct at page recommends that the unprotected EDIT be applied in a manner that benefits the Company s customers in a method to be determined after the hearing in this proceeding. The Staff Memo at page is also recommending a utility-by-utility approach subsequent to the hearing in this proceeding. Generally, I agree with both; that is, using appropriate methods in the 0 appropriate rate-setting context, unprotected EDIT should be applied for the benefit of the Company s customers. C. FINANCING COSTS CALCULATION Do the Staff Memo and CAD Direct agree with your recommendation that the Company s protected EDIT be subjected to ARAM? Yes. Both acknowledge the importance of compliance with the Normalization Rules. Did the Staff Memo or CAD Direct dispute or oppose your recommendation in your direct testimony that, if the Commission directs the Company to flow through any 0

15 Hope Cas, Inc., dba Dominion Energy West Virginia level of annual unprotected EDIT amortization to customers via a single-issue rate No. reduction, it should also recognize the financing costs incurred by the Company for such flow through? 0 If the Commission were to direct that some arbitrary amortization period be used to amortize for the early return to customers unprotected EDIT on an annual basis via a single-issue rate reduction, how would the financing costs you testified to be calculated? I explained the basis and reasoning for recognizing financing costs as a reduction to any amortized amounts to be returned early via a single-issue rate reduction in my direct testimony and will not repeat those here. The calculation to arrive at the annual financing costs amount to be deducted from the annual amortized amount of unprotected EDIT is as follows: Formula: Annual EDIT Amount x WACC = Annual Financing Costs Amount (deducted from Annual EDIT Amount) Annual EDIT Amount = The Company s total, unamortized, unprotected EDIT balance (at the end of a prior -month period, subject to true-up) + the amortization period (e.g., 0 years) WACC = The Company s weighted average cost of capital based on the debt-equity structure, cost of debt and return on equity authorized in the Company s last base rate case Does this conclude your rebuttal testimony? Yes, it does. 0