STATE OF ALASKA BEFORE THE REGULATORY COMMISSION OF ALASKA ) ) ) ) ) PREFILED DIRECT TESTIMONY OF DANIEL M. DIECKGRAEFF

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1 STATE OF ALASKA BEFORE THE REGULATORY COMMISSION OF ALASKA Before Commissioners: In the Matter of the Consideration of the Revenue Requirement Designated as TA - Filed by ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC. ) ) ) ) ) Robert M. Pickett, Chairman Stephen McAlpine Rebecca L. Pauli Norman Rokeberg Janis W. Wilson Docket No. U-1- PREFILED DIRECT TESTIMONY OF DANIEL M. DIECKGRAEFF Docket No. U-1- : June 1, 01 Page 1 of

2 PREFILED DIRECT TESTIMONY OF DANIEL M. DIECKGRAEFF TABLE OF CONTENTS I. POSITION AND QUALIFICATIONS... II. PURPOSE OF TESTIMONY AND BACKGROUND... III. (a) FILING DATA... IV. ENSTAR S BASE RATE CASE HISTORY...1 V. YEAR-END RATE BASE...1 VI. CAPITAL STRUCTURE... VII. GAS SALES AND TRANSPORTATION REVENUE ADJUSTMENTS... VIII. ADJUSTMENTS TO OPERATING EXPENSES... IX. RATE BASE ADJUSTMENTS... X. HOMER EXTENSION... XI. COST-OF-SERVICE STUDY AND RATE DESIGN... XII. REQUEST FOR INTERIM RATE RELIEF...0 XIII. MOVING STORAGE FEES FROM COST OF GAS STORED... XIV. CONCLUSION... EXHIBITS Exhibit DMD-1 Resume of Daniel M. Dieckgraeff Exhibit DMD- NARUC Resolution Exhibit DMD- Calculation of Interim Increase Docket No. U-1- : June 1, 01 Page of

3 I. POSITION AND QUALIFICATIONS Q. State your name, business address, and present position. A. My name is Daniel M. Dieckgraeff. My business address is 000 Spenard Road, Anchorage, Alaska 0. I am the Director of Rates and Regulatory Affairs for ENSTAR Natural Gas Company ( ENSTAR ) and Alaska Pipeline Company ( APC ). APC and ENSTAR are regulated as a single entity. For convenience, I will refer to these two entities collectively as ENSTAR or the Company throughout my testimony. I am appearing in this proceeding on behalf of ENSTAR. Q. Briefly describe your professional experience and educational background. A. I have been employed by ENSTAR since July 1, 1, and have held various supervisory and managerial positions with responsibility for ENSTAR regulatory matters since then. From 000 to early 00, I also had primary responsibility for gas supply contract negotiation and administration. Prior to joining ENSTAR, I spent three years with the Anchorage office of the accounting firm of Price Waterhouse (now known as PricewaterhouseCoopers). I received a Bachelor of Business Administration degree with a major in public accounting from Gonzaga University in 1 and a Master of Business Administration with a concentration in Global Finance from Alaska Pacific University in 00. My resume is attached hereto as Exhibit DMD-1. Q. Briefly describe your current professional responsibilities. A. I am responsible for all of ENSTAR s regulatory matters before the Regulatory Commission of Alaska (the RCA or the Commission ), as well as those of Cook Inlet Natural Gas Storage Alaska, LLC ( CINGSA ) pursuant to an administrative services contract between ENSTAR and CINGSA. Docket No. U-1- : June 1, 01 Page of

4 Q. Have you previously testified before the RCA or any other regulatory commission? A. Yes, I have testified before the RCA and its predecessor agency numerous times, including in ENSTAR s 000 test year base rate and rate redesign case (Docket U-00- ). I also submitted written testimony in ENSTAR s 00 test year base rate and rate redesign case (Dockets U-0- and U-0-0) and ENSTAR s 01 test year base rate and rate redesign case (Docket U-1-1), but those cases were settled before going to hearing. I most recently appeared before the Commission as a witness in Docket U-1-01 on behalf of CINGSA. II. PURPOSE OF TESTIMONY AND BACKGROUND Q. What is the purpose of your direct testimony? A. I am sponsoring various schedules supporting ENSTAR s revenue requirement filed pursuant to Commission regulation AAC.(a) ( (a) filing ), which is included as Attachment B to ENSTAR s overall rate filing. I describe several of the adjustments to test year data that ENSTAR witness Dr. Bruce H. Fairchild incorporates in his cost of service ( COS ) study to calculate ENSTAR s normalized revenues, expenses, and rate base using a test year ending December 1, 01. I also discuss various aspects of ENSTAR s COS study and its proposed rate design. Finally, I discuss ENSTAR s proposed revision to its gas cost adjustment ( GCA ) provision related to stored gas costs. I am also sponsoring the related tariff sheets that present the proposed interim and permanent rates, as well as the proposed change to ENSTAR s GCA provision. Docket No. U-1- : June 1, 01 Page of

5 1 1 Q. What information is the Company filing in this proceeding? A. ENSTAR is filing revenue requirement and COS information for the year ended December 1, 01, and rate design proposals for the Commission s consideration, pursuant to the stipulation accepted by the Commission in ENSTAR s last rate case, Docket U-1-1(1). The revenue requirement data are being filed in accordance with AAC.(a), in the form of a tariff filing as prescribed by AAC.0. The COS study and rate design information are being filed in accordance with AAC.(h), which is Exhibit BHF- to the testimony of Dr. Fairchild. In accordance with both AAC.(a) and (h), ENSTAR is providing prefiled direct testimony supporting the filing. ENSTAR is also including a request for interim rates, a rate refund plan, and proposed revisions to its GCA. Q. Which schedules in ENSTAR s (a) filing are you specifically sponsoring? A. I am sponsoring the following schedules: Comparative Statement of Assets, Liabilities and Other Credits; Comparative Statement of Income and Operating Expenses; Comparative Statement of Changes in Equity Position; 1 1 Plant in Service and Accumulated Depreciation 01 and 01; Depreciation Expense 01 and 01; 1 0 Long-Term Debt Outstanding 01 and 01; and Effective Proposed Rate Increases. 1 These schedules are required by AAC.(a)(1)-(), () and (1). Docket No. U-1- : June 1, 01 Page of

6 1 1 Q. Describe the source of the information contained on these schedules. A. These schedules contain historical financial data compiled from ENSTAR s accounting books and records, or are based on such data, for the test year ended December 1, 01. ENSTAR s accounting books and records are maintained in accordance with the Uniform System of Accounts ( USOA ) prescribed by the Federal Energy Regulatory Commission and required by this Commission pursuant to AAC.(a)(). Internal controls are in place to assure compliance with the applicable accounting instructions, including internal and external audit functions that are performed by two of the largest four international accounting firms. For internal reporting purposes, ENSTAR uses a more detailed chart of accounts than is prescribed by the USOA, but the Company s accounting system summarizes the accounts into categories that match the USOA. These accounting records are consistent with prior presentations of similar data to the Commission. 1 III. (a) FILING DATA Q. Have you reviewed ENSTAR s books and records in connection with this filing and made any adjustments to the data? A. Yes. In preparing this filing, I (or ENSTAR employees acting under my direction and supervision) reviewed the data contained in ENSTAR s accounting books and records and identified unusual events, non-recurring expense and revenue items, areas requiring or warranting adjustments for known and measurable changes, and other necessary and/or appropriate revenue, expense, and investment adjustments. This review identified and quantified adjustments needed for a fair and reasonable evaluation of the adequacy of ENSTAR s base rates. Docket No. U-1- : June 1, 01 Page of

7 The results of this review are reflected in various adjustments to test year data made to arrive at the normalized test year included in this filing. Normalizing test year data is a standard regulatory practice and is intended to give the Commission a reasonable accounting basis for evaluating and establishing ENSTAR s revised base rates. Q. What is the requirement for (a) filing data? A. In addition to the six schedules that I am sponsoring that are listed above, AAC.(a) requires schedules showing: computations of revenue requirement, and revenue deficiency or surplus, in both absolute dollars and as a percentage of revenues, for the normalized test year; test year operating revenues and expenses, pro forma adjustments, and the resulting normalized test year operating revenues and expenses; the computation of and a narrative explanation for any pro forma adjustments to the test year results of operations; the computation of the pro forma provision for income taxes for the normalized test year; the computation of rate base using a 1-month average of all rate base components except cash working capital allowance, and using any other rate base theory the utility considers appropriate and supportable (in this case, the computation of a year-end rate base); the pro forma cash working capital requirement based on the normalized test year; and Docket No. U-1- : June 1, 01 Page of

8 the computation of weighted cost of capital. These schedules are all contained in Attachment B to ENSTAR s rate filing and are sponsored by Dr. Fairchild. Q. What is a normalized test-year? A. AAC.0() defines "normalized test-year" as historical test-year adjusted to reflect the effect of known and measurable changes and to delete or average the effect of unusual or nonrecurring events, for the purpose of determining a test year which is representative of normal operations in the immediate future. In other words, it is used to develop a representative cost of service for the period during which the rates being set will be in effect. This is the traditional cost of service approach that the Commission has routinely followed in rate case orders over the years. For example, in Order U-0-0(1)/U-0-0(1), the Commission stated: [T]he goal of cost-based ratemaking is not to recover past costs but to predict the rates necessary to yield revenue adequate to cover the utility's costs and provide the opportunity to earn a reasonable return on investment during the future period when the rates are likely to be in effect. (p. -). Other examples include Order U--0() dated February, 1, p. 1-1; Order U--0() dated December 1, 1, p. ; Order U-00-0(1) dated August, 00, p. ; and Order P--00() et. al., dated November, 00, p. -. The fact that the Commission utilizes a historical test year, not a future period test year, makes the adjustments to the historical test year data very important. Q. Why are adjustments to historical test year data important? A. A utility filing a rate request before the RCA must base its request on a completed test year. Generally, it takes three to nine months after the test year ends to prepare a rate Docket No. U-1- : June 1, 01 Page of

9 request. Conditions change, operations and construction (new investment) continue, inflation occurs, labor rates increase, and overall costs almost always increase. Pursuant to Alaska Statute ( AS ).0.1(c), the statutory timeline for the Commission to rule on rate cases is 1 months. If the full amount of time is taken, by the time the new rates are put into effect, the costs from the historical test year will be more than two years old. Without taking into account changes that have occurred since the test year, the utility s rates will almost certainly be based on costs that are below those that it is actually incurring. Q. Is there a utility industry common term for this delay in implementing new final rates? A. Yes, the common term is regulatory lag, of which this is one component. Q. Is Alaska s 1-month statutory timeline for ruling on a rate case typical when compared to other jurisdictions? A. No. According to data from Regulatory Research Associates ( RRA ), % of the regulatory jurisdictions in the United States are required to rule on a rate case within twelve months of filing. Q. Does a long regulatory lag have an adverse impact on a utility? A. Yes. Both ENSTAR witnesses Mr. Robert B. Hevert and Mr. Jared B. Green discuss regulatory lag in their testimony. In addition, according to the RRA, on pages - of its Regulatory Focus publication dated January 1, 01: [I]f the state requires that a filing be based on fully historical data, i.e., the test year in the case is a historical one, the inputs used to set rates such as expenses and asset values included in rate base will be close to two years old by the time a rate change is implemented. In a construction cycle, when new capital spending is outpacing depreciation, this timing Docket No. U-1- : June 1, 01 Page of

10 mismatch is perhaps the single largest contributor to a utility s failing to earn its authorized ROE. Q. How did ENSTAR s capital spending in 01 compare to its depreciation expense? A. ENSTAR s capital expenditures in 01 were $0. million, which were. times its depreciation expense of $1. million. The combination of ENSTAR s significantly greater capital spend relative to its internal cash generation through depreciation expense and the Alaskan statutory construct subjects ENSTAR to extraordinary regulatory lag and exacerbates the risk that it will not be able to realize its authorized rate of return. Q. What are the normal types of pro forma adjustments made to test years in rate requests? A. Adjustments are commonly grouped into: (1) normalizing adjustments; () annualizing adjustments; () out-of-period adjustments; () attritional adjustments; and () reclassification adjustments. Q. What is a normalizing adjustment? A. A normalizing adjustment restates the period s data for abnormal conditions. Q. What is an annualizing adjustment? A. An annualizing adjustment extends over the period, or eliminates from the period, events that have had partial period effects and are either recurring or have been terminated. Q. What is an out-of-period adjustment? A. An out-of-period adjustment is used to adjust expenses to address known and measurable events that occur before or after the test period. Docket No. U-1- : June 1, 01 Page of

11 Q. What is an attritional adjustment? A, An attritional adjustment recognizes changing conditions, including annualizing conditions, updating of conditions, or adjusting for any known and measurable changes in events or conditions that will affect the utility s future cost or revenue levels. Q. What is a reclassification adjustment? A. A reclassification adjustment adds or removes items from one account to another for the purpose of rate recovery. Q. For an adjustment to be approved, what requirements must be satisfied? A. Normally, adjustments must be: (1) reasonably known and measurable; () synchronized with other expenses, rate base, and revenue; () supportable; and () disclosed. Q. Do ENSTAR s proposed pro forma adjustments meet these requirements? A. Yes, as described below and in the direct testimony of ENSTAR witness Dr. Fairchild. Q. Why did ENSTAR choose 01 as the test year? A. ENSTAR was required to use a 01 test year as a condition of the settlement of Docket U-1-1, ENSTAR s last rate case, which was submitted to the Commission in August 01 and accepted in Order U-1-1(1) (the U-1-1 Stipulation ). Q. What does ENSTAR s (a) filing demonstrate? A. ENSTAR s (a) filing demonstrates that even with the interim rate increase that became effective January 1, 01, ENSTAR is under-earning. Page of the (a) Docket No. U-1- : June 1, 01 Page of

12 filing, Attachment B to the rate filing, shows an annual revenue deficiency of $,1,. IV. ENSTAR S BASE RATE CASE HISTORY Q. Briefly summarize ENSTAR s history of base rate changes since it began operating. A. ENSTAR s base rates (i.e., the rates that recover the Company s costs of providing service to customers exclusive of gas costs) remained unchanged between through 1, except for a modest reduction ($1 per customer per month) instituted in 1. In 1, ENSTAR filed its first base rate increase with the Commission (Docket U--). At the conclusion of that case, the Company s base rates were increased and ENSTAR was authorized to earn a return on equity of 1.%. ENSTAR filed its second rate case in (Docket U-1-1) and was granted another base rate increase based on a 1.% return on equity. In connection with the construction of the Beluga Pipeline in 1, ENSTAR filed its third base rate case (Docket U--) and was granted another base rate increase based on a 1.% return on equity. ENSTAR s base rates remained the same from 1 through 00. As a condition of approval of SEMCO Energy, Inc. s ( SEMCO ) purchase of ENSTAR, the Company was required to file information regarding the adequacy of its base rates in 000, using a test year ending December 1, 1. 1 ENSTAR filed this data, but the Commission later determined that a test year ended December 1, 000, would be a better basis from which to evaluate rates. ENSTAR then submitted information for 1 Order U--(1)/U--(1), dated October 1, 1. Order U-00-(), dated March, 001. Docket No. U-1- : June 1, 01 Page 1 of

13 the test year ended December 1, 000, which became the basis for a base rate review in Docket U-00-. Phase One of Docket U-00- dealt with ENSTAR s revenue requirement. Based on its review, the Commission granted a 1.% return on equity and ordered a base rate reduction. The Commission also instituted a second phase of the proceeding to focus on rate design. ENSTAR filed the required rate design information in December 00, and the rate design portion of the proceeding was settled by a stipulation accepted by the Commission. Order U-0-(), dated June 1, 00, required ENSTAR to file, among other things, a revenue requirement and cost of service study. Order U-0-()/U- 0-1(1) revised the filing deadline to June 1, 00, and established a test year ending on December 1, 00. Following ENSTAR s filing, the Commission suspended and bifurcated it into two dockets: U-0- (revenue requirement) and U- 0-0 (rate design). Both dockets were settled by a stipulation accepted by the Commission, which resulted in the four general service rate classes and the rate structure currently in place. The stipulation provided for a total increase of $,1, on a rate base of $1,000,000, with a cost of equity of 1.%. The stipulation also provided that ENSTAR would file a base rate case no later than Orders U-00-(1) and U-00-(1), dated August, 00 and September 1, 00, respectively. There was a third phase of this proceeding that related to transportation terms and conditions. That phase was completed and the entire docket was closed effective May 1, 00 (Order U-00- (0)). Order U-00-(), issued May 1, 00. In the Matter of the Investigation into the Financing Provided by K-1 GHM, LLLP to SEMCO Energy, Inc. Order No. also granted a motion to withdraw and terminate the proceeding. Order U-0-()/U-0-0(), issued August, 0. Docket No. U-1- : June 1, 01 Page 1 of

14 August 1, 01 based upon a test year ended December 1, 01. In Order U-0- /U-0-0(1), dated August, 01, the Commission granted ENSTAR s request to extend the filing deadline to September, 01. In September 01, ENSTAR submitted the required revenue requirement filing along with a (h) COS and supporting testimony. The Commission suspended the filing into Docket U-1-1 and granted an interim increase of.% effective November 1, 01. The docket was settled by a stipulation accepted by the Commission, which resulted in a permanent rate increase based upon a revenue requirement of $1,0, effective October 1, 01, and an interim rate increase based upon a revenue requirement of $,, effective January 1, 01. The January 01 rates are interim and refundable pending resolution of this case. V. YEAR-END RATE BASE Q. Please describe the rate base calculation methodology that ENSTAR is requesting for ratemaking purposes. A. ENSTAR is requesting that its revenue requirement be based on the rate base measured as of December 1, 01, the end of its test year. Q. Does ENSTAR s filing comport with AAC.(a)()? A. Yes. ENSTAR s schedule of rate base (page of Attachment B to the overall rate filing) presents the required computation of rate base using a 1-month average and, following pro forma adjustments, the computation of the test year-end rate base. Schedule N also provides the detailed calculation of the 1-month averages and the Id. Appendix at. The requirement is reiterated in Ordering Paragraph No. of Order U-0- ()/U-0-0(). Order U-1-1(1), issued October, 01. Order U-1-1(1), issued September, 01. Docket No. U-1- : June 1, 01 Page 1 of

15 test year-end balances of rate base items. In addition, Attachment C contains a schedule of rate base and revenue requirement calculations based upon the 1-month average rate base method to support ENSTAR s additional interim increase request. Q. Can you explain the difference between 1-month average and test year-end rate base treatment? A. Yes. Pursuant to AAC (a)(), the 1-month average method totals balances of the rate base components at the beginning of each month of the test year, plus the balance at the end of the twelfth month, and then divides it by thirteen to arrive at the figure to be applied for the filing party s rate base. Pursuant to AAC.(a)(), however, an applicant may use any other rate-base theory the utility or pipeline carrier considers appropriate and supportable. A test year-end rate base is an example of such a theory wherein the actual rate base at the end of the test year is used to calculate the revenue requirement. Q. What is ENSTAR s basis for requesting a test year-end rate base? A. As I discussed above, the purpose of a (a) filing is to develop a representative cost of service for the period during which the rates being set will be in effect. As discussed by Mr. Green, a test year-end rate base is more representative of the future period for which rates are being set, especially when the utility has been making significant capital expenditures, as has ENSTAR. Docket No. U-1- : June 1, 01 Page 1 of

16 Q. Are you familiar with the criteria used by this Commission to assess the appropriateness of a test year-end rate base? A. Yes. The RCA may consider all relevant factors in determining the appropriate rate base treatment, and it has permitted the use of test year-end rate bases in the past, including in two of ENSTAR s prior rate cases. 1 Q. Is the historical 1-month average method the predominant method accepted in most US utility regulatory jurisdictions? A. No, most jurisdictions use a method other than the historical 1-month average of plant for rate base. In fact, the majority use either a test year-end rate base, or a future or forecasted rate base. Q. What are some of the factors the Commission has considered when it has approved the use of a test year-end rate base? A. In Order U-0-(1), the RCA took note of Golden Heart Utilities ( GHU ) argument that: [R]ates should reflect the costs that will pertain when the rates are in effect, and in this proceeding, year-end rate base will better meet that objective If average rate base is employed when revenues do not keep pace with increases in plant and depreciation, the utilities will not have a reasonable opportunity to earn the allowed return. In allowing the use of test year-end rate base in that case, the RCA reasoned: [d]uring the test year, the utilities demonstrated growth in combined rate base of almost 1 percent, reflecting the continuation of the facilities improvement program. The capital investment was to rebuild or replace worn out plant and did not See Order U--0() and Order U-0-0(1) at ( In reviewing the proposed use of a yearend rate base, we consider all relevant factors. ). 1 A year end rate base was used in ENSTAR s first rate case (Docket U--0 for the interim, Docket U-- for the permanent increase) and in its 1 test year rate case (Docket U--). Docket No. U-1- : June 1, 01 Page 1 of

17 result in nor was it intended to significantly increase customer connections. No party suggested the rate base improvements were not needed to provide safe reliable utility services. During the test year the utilities did not experience increases in the number of customers or in revenues that would offset the dramatic increase in investment. Under all of the above circumstances and for this rate case we find use of year-end rate base is reasonable. 1 Q. Does the Commission require utilities to synchronize revenues if they choose to pursue a test year-end rate base? A. While the Commission does not have a formal requirement, it has a definite preference for utilities to synchronize year-end revenues if they pursue a rate base measured at test year-end. This helps to ensure that the utility s calculation takes into account the customers and revenue generated contemporaneously with the valuation of rate base. 1 ENSTAR has addressed this preference in this filing. Q. Is the use of test year-end rate base appropriate in ENSTAR s current filing? A. Yes. As I discussed above, ENSTAR had a significant level of capital expenditures in 01 ($0. million), which was more than 1% of its 01 net plant. All of the new plant was used and useful in providing natural gas utility service to the ENSTAR s customers in 01. The majority of the capital expenditures, $. million, were attributable to non-income producing plant. Non-income producing plant is investment that does not result in nor is intended to significantly increase customer connections. In 01, ENSTAR performed a number of necessary updates and repairs to existing infrastructure that consisted of non-income producing plant. 1 Order U-0-(1) at. 1 Order U-1-() at - and Order U--() at. Docket No. U-1- : June 1, 01 Page 1 of

18 For example, ENSTAR is required to comply with federally mandated transmission pipeline integrity management, distribution pipeline integrity management and pipeline maximum allowable operating pressure testing programs. The Company spent $.1 million on capital additions to help support these programs in 01. This includes $. million spent to replace and upgrade ENSTAR s circa Potter Gate Station and install the necessary facilities to permit ENSTAR to inspect or pig its two Turnagain Arm crossings in the spring of 01 ($. million at Potter and the remainder at Burnt Island). In addition to the $.1 million spent to comply with these programs, ENSTAR spent an additional $. million on an emergency replacement of a portion of ENSTAR s 0-inch Beluga-to-Anchorage pipeline at the Beluga River crossing after the river bank receded and exposed the original line. Q. Have regulators acknowledged the need to reduce regulatory lag and the utility s near-term financial impact on the utility of these safety-related expenditures? A. Yes. The National Association of Regulatory Commissioners ( NARUC ) has long focused on pipeline safety and supported utilities and pipelines in prioritizing safety and asset replacement. In July 01, the NARUC Board of Directors Committee on Gas and Committee on Critical Infrastructure adopted the Resolution Encouraging Natural Gas Line Investment and the Expedited Replacement of High-Risk Distribution Mains and Service Lines. The resolution urges state commissions to explore, examine, and consider adopting alternative rate recovery mechanisms as necessary to accelerate the modernization, replacement and expansion of the nation s Docket No. U-1- : June 1, 01 Page 1 of

19 natural gas pipeline systems. A true and correct copy of the NARUC resolution is attached to my testimony as Exhibit DMD-. Q. In addition to the $. million spent to comply with federally mandated programs and to make the emergency repair, what other major non-revenue producing projects were included in the $. million? A. As discussed in the direct testimony of ENSTAR witness Mr. Green, and as discussed extensively in Docket U-1-1, ENSTAR built the CINGSA lateral project in 01, at a cost of $. million. The Commission approved the service area expansion for the CINGSA lateral in Order U-1-(), finding on page : that the Lateral will benefit the public by increasing the efficiency and deliverability of gas to CINGSA s customers by improving system reliability, by providing a second access pipeline to CINGSA, and by reducing transportation cost incurred by CINGSA s customers. We find the service area expansion is required for the public convenience and necessity. Q. Was the CINGSA Lateral in service in 01? A. Yes. The lateral was available for use in mid-summer 01. CINGSA customers began using the lateral for withdrawal in November 01, following the RCA decision to amend ENSTAR s certificate of public convenience and necessity. Q. Are all of CINGSA s other firm storage service ( FSS ) customers using the lateral? A. Yes. Chugach Electric Association ( CEA ) and Municipal Light and Power ( ML&P ) began using it in November 01 and Alaska Electric and Energy Cooperative/Homer Electric Association ( AEEC/HEA ) began using it in May 01. Docket No. U-1- : June 1, 01 Page 1 of

20 Q. What other major non-revenue producing capital projects did ENSTAR place in service in 01? A. As discussed by Mr. Green in his direct testimony, ENSTAR spent $. million replacing over 0,000 Encoder Receiver Transmitters ( ERTs ), a packet radio protocol used for automatic meter reading that had reached the end of their 1-year battery design lives. ENSTAR has had ERTs on all but a few of its very largest meters since the early 000 s. 1 The ERTs allow ENSTAR to use vehicle-mounted equipment to read meters by driving through neighborhoods and receiving signals from the meters, rather than physically visiting and visually reading each one, ultimately resulting in lower costs. The Company also made several other capital expenditures in 01 necessary for the utility s ongoing delivery of safe, reliable service to its customers, and which include: computer network improvements ($,000); phone system improvements ($1,000); replacement of a pipeline interconnection meter ($0,000); an upgrade of ENSTAR s customer information and billing system ($,); a gate station replacement on the Kenai ($1,000); and 0 1 security cameras ($,000). These projects are necessary to ensure ENSTAR s safe, efficient, and reliable service to its customers. Because these projects updated and repaired existing infrastructure, 1 The largest meters have electronic totalizers and/or telemetry. Docket No. U-1- : June 1, 01 Page 0 of

21 these costs, while absolutely critical for ENSTAR s service, did not result in additional demand or a growth in customer base. Q. Were there plant additions in 01 that did result in growth in ENSTAR s customer base and gas demand? A. Yes. ENSTAR spent approximately $. million in plant additions for gas distribution mains, service lines, meters, and related items that serve new customers. Q. Have you synchronized expenses and revenues to support your test year-end rate base? A. Yes. ENSTAR recognizes the value that the Commission places on the matching principle in which expenses are synchronized with other revenue requirement components, such as revenues. A filing party is not required to make this synchronization in order to receive year-end rate base treatment. Out of an abundance of caution, however, ENSTAR has synchronized expenses and revenues in the present rate filing. Q. Which adjustments synchronize revenues and expenses, and support ENSTAR s test year-end rate base request? A. I will simply list the affected adjustments here. Dr. Fairchild will cover the details of certain calculations in his direct testimony, and I will cover the remainder of the details in my testimony below. Volumes and revenues for General Service customers are synchronized with the test year-end rate base on page 1 of the (a) filing, with the details contained in Schedule A in Attachment B. This adjustment reflects increased revenues (resulting in a $,1 increase in gross margin) to reflect the test year-end General Service customer count and corresponding usage. On the Docket No. U-1- : June 1, 01 Page 1 of

22 expense side, net credit card costs (up $1,1), postal expenses (up $), uncollectible accounts (up $1,1), depreciation and amortization expenses (up $,0), and property taxes (up $10,) have also been synchronized to test year-end rate base. Q. Were there other rate base items synchronized for the test year-end plant? A. Yes. They are shown on Adjustment N on the Rate Base Schedule, page of Attachment B. Most notably, Accumulated Depreciation, Construction Advances and Deferred Income Taxes have all been adjusted (synchronized) to match year-end plant. Where applicable, Deferred Income Taxes also include the effect of bonus tax depreciation. Q. Were there any components of rate base not adjusted to a test year-end basis? A. Yes. ENSTAR did not adjust Materials and Supplies, Prepayments, and Gas Stored Underground from the 1-month rate base treatment to a test year-end rate base treatment, for reasons discussed in more detail below. Also, the U-1-1 Stipulation required ENSTAR to perform a lead-lag study, which forms the basis for the requested cash working capital allowance included in rate base. 1 VI. CAPITAL STRUCTURE Q. What capital structure is ENSTAR using in the (a) filing? A. ENSTAR is using its actual capital structure as of December 1, 01, which is.% long-term debt and 1.% common equity. For comparison, the capital structure that was proposed and accepted in ENSTAR s last rate case (Docket U-1-1) was.% debt and.% equity. Docket No. U-1- : June 1, 01 Page of

23 VII. GAS SALES AND TRANSPORTATION REVENUE ADJUSTMENTS Q. What are revenue adjustments and why are they important in setting revised base rates? A. As I discussed above, base rates should recover the utility s expected costs of providing service to customers in the rate effective period (i.e., when rates will be in effect). An element of that process is using historical test year data to estimate the amount of revenues a utility is likely to collect in the rate effective period. Revenue adjustments are necessary to reflect known and measurable changes from the unadjusted test year data. While some of these adjustments appear on different schedules, I quantify the proposed adjustments as part of my discussion of each item below. Q. What adjustments to revenues included in ENSTAR s (a) filing will you be discussing? A. First, I will discuss the adjustments made to all rate classes for the Docket U-1-1 rate changes, as well as the adjustment to the gas sales customers for the gas cost adjustment change, which ENSTAR has filed with the Commission with a requested effective date of July 1, 01. Second, I will discuss the adjustments to the General Service rate classes to synchronize revenues with the test year-end rate base and customer count and usage. Finally, I will discuss the adjustments to the revenues ENSTAR actually received from its power plant customers in 01 to adjust for a power plant that came on-line during the test year, and for a new power plant scheduled to come on-line during the summer of 01. Docket No. U-1- : June 1, 01 Page of

24 Q. Please discuss the adjustments made to the General Service rate classes for the Docket U-1-1 rate changes. A. The Docket U-1-1 Stipulation provided for a permanent rate increase effective October 1, 01, and an additional interim increase effective January 1, 01. As discussed in more detail in Dr. Fairchild s direct testimony and shown on Schedule A of Attachment B to the rate filing, ENSTAR has made annualizing adjustments to revenues from the General Service classes to reflect the current level of revenues attributable to the January 1, 01 interim rate increase. Q. Please discuss the adjustment made for the cost of gas. A. The cost of gas in the test year was removed and replaced with the weighted average cost of gas that will become effective July 1, 01, which is $.0 per Mcf, as proposed in ENSTAR s annual gas cost adjustment revision filing, TA -, filed on May 1, 01. The adjustment to remove the test year gas cost and to add the new gas cost is also developed in Schedule A. Q. What other adjustment to the General Service Revenues is shown on Schedule A? A. As Dr. Fairchild discusses in his direct testimony, ENSTAR has made an annualizing adjustment to increase the General Service revenues to reflect the actual number of ENSTAR customers during December 01 and their corresponding usage. Q. Why did ENSTAR make such an adjustment? A. As I discussed earlier, ENSTAR is proposing to use a test year-end rate base, including the test year-end level of plant. The adjustment to the General Service revenues is what is termed as a synchronization adjustment, which is necessary to Docket No. U-1- : June 1, 01 Page of

25 match the income and expenses related to the test year-end balance of the rate base. This adds revenue to match the income producing plant that has been added to serve these new customers. In past cases, the Commission has required that revenues be increased to reflect the test year-end customer count when a test year-end rate base is used. Revenue adjustments for the number of customers at test year-end and their corresponding usage to synchronize to a test year-end rate base was used to calculate the revenue requirements for ENSTAR in Orders U--() and U--(1). Q. Please discuss the adjustments shown on Schedule B. A. As discussed in more detail by Dr. Fairchild, Schedule B shows the annualizing adjustments to the large volume customer revenues (those of the power plants, industrial customers, and the Titan liquefied natural gas facility) for the January 1, 01 interim rate increase. Q. Was an adjustment made to consider the effects of the Matanuska Electric Association ( MEA ) power plant that began operating during the test year? A. Yes. MEA s Eklutna Generating Station ( EGS ) began operating during 01. EGS receives gas transportation service from ENSTAR, and ENSTAR began receiving revenues from EGS transportation in December 01. Prior to EGS becoming operational, MEA received the bulk of its power needs from CEA. CEA continued to partly supply MEA with power until May 1, 01. After discussions with both CEA and MEA, ENSTAR decided that the period of May 1, 01, to April 0, 01, would be more representative of what to expect for EGS s load and the load of the SouthCentral Power Project ( SPP ), which is jointly owned by CEA and ML&P and which was also partially used to supply MEA with power before May 1, 01. The Docket No. U-1- : June 1, 01 Page of

26 adjustment for volumes and revenues for both plants is shown on Schedule C. Both plants are currently served under ENSTAR s Very Large Firm Transportation ( VLFT ) rate schedule. Q. Do these power plant customers oppose this adjustment? A. Not to my knowledge. ENSTAR consulted with these customers on the appropriateness of this adjustment, and none opposed it. Q. What is the other adjustment shown on Schedule C? A. Schedule C also shows a downward adjustment to ML&P s volumes and revenues to reflect the anticipated impact of its new generation Plant A currently under construction and scheduled to come on-line in late Summer or Fall 01. ML&P has publicly stated that the new power plant will provide significant natural gas savings. This affects ENSTAR because all of ML&P s gas volumes are transported on the ENSTAR system. Q. Did ENSTAR discuss this adjustment with ML&P? A. Yes. ML&P provided ENSTAR with its estimated annual gas requirement for its entire native load after its new Plant A becomes operational, including its share of SPP. ENSTAR took that estimate and reduced it by ML&P s 0% share of the adjusted SPP volumes, to arrive at the combined adjusted volumes for ML&P s plants 1, and A. ENSTAR provided these calculations and results to ML&P and CEA, and neither objected to the adjustment. Docket No. U-1- : June 1, 01 Page of

27 Q. Are there other potential reductions in power plant usage that ENSTAR could see during the period during the rate effective period? A. Yes. As the Commission is aware from its investigation in Docket I-1-001, there are ongoing efforts to achieve a more economic dispatch of the region s electric generation. On February 1, 01, CEA and ML&P reported to the RCA about their intent to develop a mutually-beneficial power pooling and joint dispatch arrangement ( Anchorage Pool ). In their update, both utilities identified the benefits attainable under economic dispatch, including estimated savings exceeding $ million per year. Since ENSTAR transports all of ML&P s and SPP s gas used for generation (as well as MEA s), any reduction in the combined usage resulting from economic dispatch efforts will adversely affect ENSTAR if the reductions are not taken into account during the course of this proceeding. VIII. ADJUSTMENTS TO OPERATING EXPENSES Q. Why you are proposing a series of expense adjustments for purposes of determining ENSTAR s revised base rates? A. Base rates recover a utility s non-gas costs of providing service to customers. Just as test year revenue-related items often require adjustment to be representative of expected rate-effective period conditions, test year expenses often must be adjusted for the same reason. Q. What adjustments to expenses are included in ENSTAR s (a) filing? A. Several adjustments to expenses are included in ENSTAR s (a) filing. I will discuss and sponsor the payroll expense adjustments (shown on Schedule D), the credit card program adjustment (Schedule E), the outside professional services Docket No. U-1- : June 1, 01 Page of

28 adjustment (Schedule H), the insurance adjustment (Schedule I), and the regulatory expense adjustment (Schedule J). Q. Please discuss the Payroll Adjustment shown on Schedule D. A. The purpose of the payroll adjustment shown on Schedule D is to account for changes in the number, composition, and compensation of ENSTAR personnel compared to the test year data. Q. How did ENSTAR develop the Payroll Adjustments? A. ENSTAR has broken the adjustment into three components. The first component includes updating the test year level employee count, hours worked at current wage levels, and other measurable compensation increases. The second component includes normalizing the test year employee count and hours worked for vacancies that occurred during the test year as well as positions that were eliminated or added during the test year. The third component includes reflecting post-test-year known and measurable changes for positions that have been eliminated or added. Q. How was the first component of the Payroll Adjustment shown on Schedule D developed? A. ENSTAR s test year pay and personnel rolls were reviewed on a position-by-position and person-by-person basis. Wage rates were adjusted to reflect salary and wage rates for each non-union position in effect at April 1, 01. For union-represented clerical and operations employees, wage rates were adjusted to reflect scheduled grade changes through July 1, 01, along with a 1.% across-the-board wage Docket No. U-1- : June 1, 01 Page of

29 increase set out in the union contracts that becomes effective April 1, 01.1 ENSTAR s union contracts run to March 1, 00, with scheduled increases effective every April 1. ENSTAR did not include the increases scheduled to take effect in April 01 and April 01 in this adjustment. If a position was vacated and refilled during the test year, the wage rate of the most recent occupant of that position was used. After all of these adjustments were computed, the adjusted payroll was then allocated to ENSTAR s expense and capital accounts on the same basis as the 01 payroll to determine the change in wages and salary costs for each expense account. The summarized amounts for the expenses are shown in the column titled Current Salary Levels on Schedule D. Q. How was the second component of the Payroll Adjustment shown on Schedule D developed? A. As noted above, ENSTAR s test year pay and personnel rolls were reviewed on a position-by-position and person-by-person basis. For every position that was added or partially vacant during the test year, ENSTAR adjusted the hours worked to reflect what the normal annual number of hours would be for that position on an ongoing basis. All of these positions were occupied for at least a portion of the test year. Hours and amounts for positions that were eliminated during the year were removed. For the added and vacated positions, the wage rate of the most recent occupant of that position was used. After all of these adjustments were computed, the adjusted payroll was then allocated to ENSTAR s expense and capital accounts on the same basis as 1 The bargaining unit of the union representing the operations employees ratified the contract in May 01. Ratification of the contract by the bargaining unit of the union representing the clerical employees is pending. Docket No. U-1- : June 1, 01 Page of

30 the 01 payroll to determine the change in wages and salary costs for each expense account. The summarized amounts for the expenses are shown in the column titled Normalized Positions on Schedule D. Q. How was the third component of the Payroll Adjustment shown on Schedule D developed? A. The third component of the adjustment takes into account post-test year known and measurable changes for positions that have been eliminated and positions that have been added. Since December 1, 01, ENSTAR has added one new position and eliminated one position. For the added position, ENSTAR used a similar existing position to allocate hours. The net effects of the added and eliminated positions are shown in the column titled Post-TY K & M Changes on Schedule D. Q. Are there other adjustments shown on Schedule D associated with the Payroll Adjustment? A. Yes. The three components described above were totaled (or netted as the case may be) to arrive at a wage adjustment for each major expense category. Each wage adjustment was then multiplied by an effective payroll loading rate (that includes payroll tax rates and accruals for holidays and leave) to calculate the associated payroll benefits and a total payroll expense adjustment amount for each major expense category. The amount for administrative and general expenses ( A&G ) was further reduced by.1% to reflect the amount of A&G that was capitalized or charged to others (reimbursed) during the test year. The total adjustment to operating expenses for all components of the payroll expense adjustment is $0,1. Docket No. U-1- : June 1, 01 Page 0 of

31 Q. Are all components of the Payroll Adjustment reasonable? A. Yes. As discussed above, it is a longstanding Commission policy that base rates should recover the utility s expected costs of providing service to customers in the rate effective period. The adjustment of wages and salaries used in the first component reflect the known changes in labor rates that ENSTAR will experience at a minimum during the rate-effective period. The normalization of positions used in the second and third components reflect the known changes to positions and hours that ENSTAR has experienced and would expect to experience during the rate effective period. Similar adjustments were made in previous ENSTAR rate cases, Dockets U-- and U-00-, and were accepted by the Commission as part of the revenue requirement in those dockets. Further, in Order U--1(1), the Commission specifically approved the use of budgeted positions for the year after the test year, rather than the actual employee counts and hours worked in the test year. The Commission noted on page of that Order that it is desirable to use an adjustment that does reflect, as closely as possible, the current operations. Q. Please discuss the Credit Card Expense Adjustment shown on Schedule E. A. Prior to February 01, ENSTAR did not accept credit card, debit card, or similar payments directly from a customer. Historically, the Company arranged with a third party to accept payments from customers by credit card, debit card and electronic check for a fee ($.0 per transaction) that was assessed by the third party directly to the customer. ENSTAR did not receive any part of the fees charged for this service. This method of collecting payments engendered many complaints from customers who wanted to pay by credit and debit card without incurring a processing fee. Docket No. U-1- : June 1, 01 Page 1 of

32 In its last rate case (Docket U-1-1), ENSTAR proposed an adjustment to its operating expenses for the estimated net annual expense of accepting credit card (and similar) payments without assessing a fee to the customer. The adjustment was not opposed by RAPA or any other party to that case. After the Commission accepted the stipulation that settled ENSTAR s last rate case in October 01, ENSTAR moved forward with its proposal to modify its credit card payment program. The Company selected a credit card processing vendor, modified its customer information system, modified its tariff, and began directly accepting credit card payments in February 01. The adjustment shown on Schedule E reflects the final negotiated transaction fee of $1. per transaction, and ENSTAR s expectation that approximately,000 credit card transactions per month will occur, which translates to an assumed use rate of approximately 0%. ENSTAR s projected use rate is based upon the experiences of other utilities that currently accept credit cards without charging the customer a related fee and the frequency of customer requests to use credit cards as a means of payment. For example, approximately % of the customers of Anchorage Water and Wastewater Utility pay with credit cards. In the first full month of the new credit card payment program (March 01), ENSTAR had almost 1,000 credit card transactions, a four-fold increase from January 01 when the old program was still in effect. In May 01, ENSTAR added more features to its program including the ability for customers to enroll in recurring credit card payments and the ability for its door taggers to accept credit card payments in the field. The net effect of the Credit Docket No. U-1- : June 1, 01 Page of