STATE OF ALASKA BEFORE THE REGULATORY COMMISSION OF ALASKA ) ) ) ) ) PREFILED DIRECT TESTIMONY OF JARED B. GREEN

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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 JARED B. GREEN Docket No. U-1- : June 1, 01 Page 1 of

2 PREFILED DIRECT TESTIMONY OF JARED B. GREEN TABLE OF CONTENTS I. POSITION AND QUALIFICATIONS... II. PURPOSE OF DIRECT TESTIMONY... III. OVERVIEW OF RATE FILING... IV. HISTORY AND OPERATIONS OF ENSTAR... V. ENSTAR HAS MADE SUBSTANTIAL NEW INVESTMENTS TO SUPPORT SAFETY AND RELIABILITY AND SERVE NEW CUSTOMERS...1 VI. ENSTAR S UNIQUE COMBINATION OF RISKS REQUIRES A RATE OF RETURN THAT WILL ADEQUATELY COMPENSATE INVESTORS AND ALLOW ENSTAR TO ATTRACT NEW CAPITAL TO ALASKA... VII. CONCLUSION... EXHIBITS Exhibit JBG-1 Exhibit JBG- Current Resume of Jared B. Green Map of ENSTAR System 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 Jared B. Green. My business address is 000 Spenard Road, Anchorage Alaska 0. I am the President of ENSTAR Natural Gas Company ( ENSTAR ) and of Alaska Pipeline Company ( APC ) and am appearing in that capacity in this proceeding on behalf of ENSTAR and APC. For convenience, I will refer to ENSTAR and APC together as ENSTAR or the Company. ENSTAR is a division of SEMCO Energy, Inc. ( SEMCO ). Q. Briefly describe your professional experience and educational background. A. Since 01, I have been President of ENSTAR and of Cook Inlet Natural Gas Storage Alaska, LLC ( CINGSA ). Prior to assuming my current positions, I oversaw the accounting, financial reporting, and internal controls for AltaGas Ltd. ( AltaGas ), ENSTAR s ultimate parent company. AltaGas is a publicly-traded, leading North American energy infrastructure company with a focus on natural gas, power, and utility operations in Canada and the United States. In addition to my positions within ENSTAR, I also hold board positions for other companies within the AltaGas organization. Prior to becoming AltaGas Vice President and Corporate Controller in 01, I was responsible for the finance, accounting, financial reporting, and internal controls for the utilities division of the organization, and was a senior member of the strategy and regulatory oversight teams for AltaGas utility assets. I have been a lead member of the due diligence teams for AltaGas utility acquisitions, namely Heritage Gas Limited in 00, Pacific Northern Gas Ltd. in 0, and SEMCO in 01. At various times in my tenure at AltaGas, I have been a member of the Board of Docket No. U-1- : June 1, 01 Page of

4 Directors for SEMCO, AltaGas Utilities Inc., and Heritage Gas Limited, among others. I hold degrees in Economics and Commerce from the University of Calgary and the University of Saskatchewan, respectively, and am a designated Chartered Professional Accountant with the Institute of Chartered Professional Accountants of Alberta. My resume is attached hereto as Exhibit JBG-1. Q. Briefly describe your current professional responsibilities. A. As President of ENSTAR, I am responsible for the day-to-day operations and financial performance of the largest energy utility in Alaska. I direct all aspects of the organization, including the Company s safe operations, deployment of capital, and regulatory strategy. I am the leader of 00+ dedicated employees and interface with stakeholders external to the Company, including the Alaska State Legislature, the executive branch, and other business leaders in Alaska. Q. Have you previously testified before the Regulatory Commission of Alaska (the RCA or the Commission ) or any other regulatory commission? A. Yes. I testified before the RCA in ENSTAR s base rate case in 01, Docket U-1-1, and in Docket U-1-01 relating to certain CINGSA issues. Additionally, I have testified before the Alberta Utilities Commission on two occasions and once before the British Columbia Utilities Commission. 0 II. PURPOSE OF DIRECT TESTIMONY 1 Q. What is the purpose of your direct testimony? A. The purpose of my direct testimony is to provide a general overview of this rate filing; to describe the history and operations of ENSTAR and the value ENSTAR brings to its,000 customers in Southcentral Alaska; to describe the substantial Docket No. U-1- : June 1, 01 Page of

5 capital that has been invested by ENSTAR since its last rate case; and to describe the importance to ENSTAR and the State of Alaska of maintaining a proper utility investment environment, particularly given the unique risks that ENSTAR faces. III. OVERVIEW OF RATE FILING Q. What statutory standard applies to the Commission s review of this filing? A. Pursuant to Alaska Statute.0.(a)(), the Commission is empowered to make or require just, fair, and reasonable rates... for a public utility.... To assist the Commission in determining just, fair, and reasonable rates and in compliance with the stipulation accepted by the Commission in Docket U-1-1(1) ( U-1-1 Stipulation ), ENSTAR has prepared a revenue requirement and cost of service study that comports with AAC.(a) and (h). Q. What is ENSTAR requesting in this filing? A. ENSTAR requests an overall increase of.% to allow the Company an opportunity to recover its just and reasonable costs and earn a fair return of and on prudent capital investments in ENSTAR s transmission and distribution systems in Southcentral Alaska, which investments were used and useful to provide service to ENSTAR customers during the test year. Our rate filing includes a request to maintain our current return on equity ( ROE ) of 1.%, a proposed capital structure of 1.% equity and.% debt, and a proposed cost of debt of.0%. ENSTAR further requests an interim and refundable increase of 1.%, to be effective August 1, 01. Finally, ENSTAR requests approval of its proposed rate design and a change in the methodology it uses to apply storage fees, effective October 1, 01. Docket No. U-1- : June 1, 01 Page of

6 Q. Why is ENSTAR requesting an increase in base rates? A. ENSTAR has made capital investments of $0. million and experienced increases in annual operating expenditures totaling over $. million since filing its last rate case. These increases in investment and routine cost of doing business have resulted in ENSTAR under-earning by a significant margin. An adjustment is necessary to reflect the sizeable investments ENSTAR has made on its customers behalf and its reasonable cost to provide safe and reliable service. Q. From your perspective as the President of ENSTAR, what are some of the important issues in ENSTAR s rate filing? A. We are presenting a case that reflects our actual cost of doing business and an ROE that is fair and compensatory and will allow us to continue to attract capital at a reasonable cost and invest in the ENSTAR system. We are also presenting a case that fairly allocates our costs to provide service across our various customer classes. Our mission to provide safe and reliable service is an important one that we take very seriously, and it is critical that we recover our reasonable costs, earn a reasonable return, and attract new capital to Alaska. So, in this sense, every element of our request is important. Most of our filing, however, should not be controversial. We are not proposing any adjustments or proposals that are unique or abnormal, outside of the transportation rate design, which ENSTAR developed in close coordination with the electric utilities. As discussed in the direct testimony of ENSTAR witness Daniel M. Dieckgraeff, we are proposing to use a test year-end rate base, which is different from our last rate filing, but consistent with historical rate cases, reflects our actual levels Docket No. U-1- : June 1, 01 Page of

7 of capital investment, and is common practice in many other jurisdictions. We are also proposing to continue the gradualism to full cost concept that was agreed to in arriving at the rates for the U-1-1 Stipulation. In developing the rates in the U-1-1 Stipulation, the increase applied to the revenue requirement for any one rate class was limited to % of the overall revenue requirement increase percentage, with the difference proportionally reallocated to the revenue requirement of those rate classes that had increases under the limit. ENSTAR is using the same % cap in developing the rates it is proposing in this case. As I will discuss in more detail later in my direct testimony, approval of our requested ROE is important to ENSTAR and our ability to attract new capital to Alaska. ENSTAR owns and operates both transmission and distribution systems that are unlike any other in the United States and that face a unique bundle of risks. Our ROE should reflect these risks and our commitment to Alaska, which is demonstrated by our substantial new investment since our last rate filing. Q. Please describe the rate filing package. A. Our rate filing package includes the standard schedules and information required by the RCA under the relevant statutes and regulations. In addition, our rate filing is supported by my direct testimony, as the lead policy witness, and by direct testimony from the following witnesses: Robert B. Hevert John D. Sims Cost of Capital Expert ENSTAR Benefits from Shared Services and Corporate Services Mark A. Moses SEMCO Energy, Inc. Shared Docket No. U-1- : June 1, 01 Page of

8 Services Jillian Fan Joshua C. Nowak AltaGas Ltd. Corporate Services Lead-Lag Study Daniel M. Dieckgraeff Revenue Requirement and Adjustments Dr. Bruce H. Fairchild Cost of Service and Rate Design Through our schedules and direct testimony, we present a case that satisfies the rate filing requirements, supports reasonable rates that are fair to our customers and our investors, and will allow us to continue our mission to invest in Alaska and provide safe and reliable service. Q. What rate design is ENSTAR considering for the electric utilities? A. Over the past year, in part with the encouragement of the Commission, Southcentral Alaska electric utilities have worked to increase the coordination and cooperation among themselves relating to the generation of power for the region. The aim of this coordination has been to serve their customer bases by pooling resources and assets to most efficiently serve system need. After consulting with the electric utilities, ENSTAR modified its rate structure for Very Large Firm Transport ( VLFT ) customers and is offering a new rate schedule to assist the electric utilities in their pooled efficiency goal. Docket No. U-1- : June 1, 01 Page of

9 IV. HISTORY AND OPERATIONS OF ENSTAR Q. Please provide a brief history of ENSTAR. A. ENSTAR 1 was first organized in 1 and won franchise elections from the communities of Anchorage, Spenard, and Fairview that fall. Gas service began in the summer of after ENSTAR completed the construction of a 1-inch pipeline across the Kenai Peninsula from the Kenai Gas field, under Turnagain Arm, and into Anchorage. During its early years, the Company faced severe competition from heating oil suppliers and coal at the power plants. On March, 1, ENSTAR faced its greatest challenge in Company history the Good Friday Earthquake. A natural gas line broke at Second Avenue and Post Road, shutting down the main power plant. ENSTAR crews worked around the clock from :0 p.m. on Friday through Monday to run temporary lines above ground to restore service to the power plant. It took the rest of summer for ENSTAR to restore service to all of its service areas. In step with the Municipality of Anchorage, ENSTAR grew exponentially in the early 10s. By, it had become Anchorage s largest taxpayer, serving nearly 0,000 customers. In 1, the same year the Trans-Alaska Pipeline delivered the first barrel of oil to Valdez, ENSTAR was awarded Anchorage s Municipal Beautification Award for its recently completed administration building at 000 Spenard Road, the office still in use today. As the years passed, ENSTAR prudently invested in its system to ensure natural gas demand was met hours a day, days a year to its customers, who now number approximately, The Company was called Anchorage Natural Gas Corporation at that time; the Company was renamed ENSTAR Natural Gas Company in 1. Docket No. U-1- : June 1, 01 Page of

10 Q. Please describe ENSTAR s core values. A. ENSTAR s core values have remained steadfast and unwavering since its inception in 1 and are as follows: Safety. Ensuring safety is at the forefront of everything we do. When our Company talks about safety, we refer not only to the service that we provide, delivering natural gas to our customers, but also to our priority to operate safely during the workday and within the communities we serve. As an example of the unwavering nature of this commitment, in 1 ENSTAR received an award from the American Gas Association ( AGA ) in recognition of the utility s outstanding motor vehicle safety record during 1. Fast forward years in 01, ENSTAR received the same recognition from the AGA. This recognition was all the more meaningful because our employees drove over 1,00,000 miles in 01 to serve our customers needs. Safety is at the forefront of everything our employees do, and the result is providing a service that our customers have relied on for years. Clean and Reliable. Providing a clean and reliable product to our customers days a year. ENSTAR customers know that when they turn up their thermostat, the natural gas is always there. ENSTAR demands the very best from the natural gas producers it does business with regarding the quality of its production. ENSTAR will not accept gas that is less than pipeline quality, ensuring our customers receive a predictable and reliable product. Moreover, natural gas is the cleanest burning source of fossil fuel-based energy. We take Docket No. U-1- : June 1, 01 Page of

11 extreme care to be stewards of the environment in which we work and provide natural gas service. Service. Making investments in our community, our people, and our customers every employee is an ENSTAR ambassador. ENSTAR s obligation to its certificated area is not only to strive to provide consistent, safe natural gas delivery and transportation, but also to serve our communities. Over the past ten years, ENSTAR has contributed hundreds of thousands of dollars and numerous volunteer hours to various organizations across Southcentral Alaska. Dedication. Knowledgeable, passionate staff working together to provide outstanding service. ENSTAR employs 00+ people from across Southcentral Alaska. These employees, many of whom have been with the Company for decades, are tremendously knowledgeable and passionate about their profession. Each of our employees resides in the communities we serve and takes pride in the important role that ENSTAR plays in those communities. Integrity. Doing the right thing every time. ENSTAR senior management meets quarterly with its employee base to provide various updates about the Company, upcoming projects, and recent happenings. Every meeting opens with a discussion on safety and is concluded with a final thought, Every employee is an ENSTAR ambassador. Do the right thing every time. All individuals who work in Alaska for ENSTAR are technically SEMCO employees, as ENSTAR is a division of SEMCO. Docket No. U-1- : June 1, 01 Page of

12 Q. Please describe ENSTAR s physical plant. A. ENSTAR is an integrated, hybrid system, composed of both natural gas transmission and distribution assets. The transmission assets move gas from supply areas to large consumers (such as power generation facilities) and our distribution system. Our distribution assets deliver gas to smaller end-users such as homes, schools, and hospitals. ENSTAR s transmission system is comprised of approximately miles of 1- to 0-inch diameter pipeline and approximately miles of smaller diameter pipeline. The system s present design delivery capacity is approximately 0-0 million cubic feet per day ( MMcf/d ). The transmission system consists primarily of two pipeline systems that extend from various natural gas fields on both sides of Cook Inlet into the Anchorage area. I have attached a simplified map to my direct testimony as Exhibit JBG-. The original pipeline system, the Kenai Pipeline System, serves the east side of Cook Inlet and enters Anchorage from the south through the Potter Gate Station. The other pipeline system, the Beluga Pipeline System, serves the west side of Cook Inlet and enters Anchorage from the north near ML&P s Plant. The two pipeline systems are interconnected in Anchorage, allowing the distribution system to serve customers from either pipeline system. The origination points of the two pipeline systems are also interconnected by means of a producer-owned pipeline, creating a full loop of the transmission system. The Kenai Pipeline System was placed into service in and currently receives gas from the Kenai, Beaver Creek, Swanson River, Ninilchik, Trading Bay, and McArthur River gas fields, among others, as well as gas stored in the CINGSA Docket No. U-1- : June 1, 01 Page 1 of

13 natural gas storage facility. The main trunk line of the Kenai Pipeline System originates at the Kenai Gas Field and extends for approximately miles to Anchorage. It consists of two pipelines with diameters of 1 to 1 inches and operates at pressures up to 1,0 pounds per square inch gauge ( psig ). ENSTAR also has a -mile, -inch diameter pipeline that connects KPL Junction to ENSTAR s main trunk line. The CINGSA storage facility is connected to the Kenai Pipeline System through a -mile, 1-inch diameter pipeline that ENSTAR completed in 01. The Kenai Pipeline System includes a nine-mile, twin 1-inch diameter crossing of the Turnagain Arm of Cook Inlet, landing at Potter Gate Station. The crossing includes two separate pipelines that may be operated independently. Powered by two compressor stations with an aggregate of,0 horsepower, the system on the east side of the Inlet has a present delivery capacity of approximately -0 MMcf/d. The transmission system on the west side of the Inlet, the Beluga Pipeline System, was completed in 1 and extends from the Beluga River gas field through the Pretty Creek gas field, passing the Lewis River and Ivan River/Stump Lake gas fields before reaching the Anchorage area. Along the mainline route, gas is provided to Matanuska-Susitna Borough and Eagle River customers. The mainline operates at pressures up to 1,0 psig and consists of a single -mile, 0-inch diameter line with several smaller laterals extending service off of the main line. The Lewis River, Pretty Creek, Ivan River, Stump Lake, Trading Bay, and McArthur River gas fields are connected to the Beluga mainline by lines owned by the producers of the fields. Docket No. U-1- : June 1, 01 Page 1 of

14 The present delivery capacity of this portion of the system is approximately -00 MMcf/d. In, ENSTAR connected its system to Hilcorp s (then Marathon s) newly constructed Granite Point to Beluga pipeline, establishing a complete natural gas pipeline loop around Cook Inlet. In 1, ENSTAR completed a series of upgrades to its transmission system to increase the amount and pressure of gas entering Anchorage. As a result of those upgrades, ENSTAR is able to reverse the flow of the Kenai Pipeline System and has often transported gas for industrial users from the Beluga Field through Anchorage to Nikiski. In 1, ENSTAR was awarded a -year lease of the Department of Defense s Whittier to Elmendorf Air Force Base petroleum products pipeline. In 1, ENSTAR converted the line to natural gas use, tied it into the ENSTAR system, and began providing natural gas service to communities along the Turnagain Arm. ENSTAR s transmission pipelines are constructed of externally coated, welded steel, have impressed-current cathodic protection for corrosion prevention, and are leak-surveyed at least annually. Substantially all of ENSTAR s systems are constructed and run through property owned by public and private third parties pursuant to permits and right-of-way grants, which allow ENSTAR uninterrupted possession and use of its systems. Within the Anchorage area, ENSTAR owns and operates approximately 0 miles of -inch to 1-inch diameter transmission pipeline at an operating pressure of 0 to psig. In addition, ENSTAR owns and operates approximately miles of Docket No. U-1- : June 1, 01 Page 1 of

15 inch through 1-inch diameter pipelines with operating pressures between 1 and psig. These pipelines serve large customers and act as gas feeders for the distribution system within the Anchorage area. ENSTAR distributes natural gas through a network of approximately,000 miles of distribution pipeline, with approximately 1,000 service lines connecting natural gas service to approximately,000 residential, commercial, and industrial customers. The cities and environs served include Anchorage, Anchor Point, Big Lake, Bird Creek, Butte, Eagle River, Girdwood, Homer, Houston, Indian, Kasilof, Kenai, Knik, Palmer, Nikiski, Nikolaevsk, Soldotna, Wasilla, and Whittier. Regulator stations reduce either transmission or intermediate pressure pipeline gas to distribution pressure so that it may safely feed into the distribution system. Regulator station designs vary, but are generally dual feed regulator stations with one active pressure reduction run and a second backup run, with over-pressure protection provided by relief valves. Most areas are served by more than one regulator station interconnected by large diameter distribution pipelines. There are a few population centers that are served by a single regulator station, with Girdwood and Homer as examples of larger such communities. The first distribution mains were placed into service in. All mains are either steel or high-density polyethylene ( PE ). Mains installed before 1 are made of steel. ENSTAR began installing PE mains in 1, and by late 1, distribution mains less than inches in diameter were routinely installed using PE. Today, most -inch mains and some -inch mains are installed using PE, with larger mains using externally-coated welded steel. Early service lines were constructed of Docket No. U-1- : June 1, 01 Page 1 of

16 copper or externally-coated welded steel. About,00 copper service lines were installed in the 10s, of which some 1,0 remain in service today. Between 1 and 1, polyethylene-coated steel tubing was widely used. PE service line use began in 1 and by late 1, service lines smaller than inches in diameter were installed using PE. Over 1,000 PE service lines are in use today. Q. Has ENSTAR evaluated expansion to currently unserved communities? A. Yes. Q. What challenges does ENSTAR face when attempting to serve communities in the outer reaches of the certificated area? A. As stated in Governor Walker s Inauguration speech on December 1, 01, the key to every growing economy is low-cost energy. Alaska is rich in resources. We don t have a resource problem. We have a distribution problem.... There are a number of communities outside of the major population hubs in Southcentral Alaska, but still within or near ENSTAR s certificated area that desire natural gas service. These communities (such as Seward, Kasilof, Willow, Nancy Lake, etc.) have asked ENSTAR to extend natural gas service to their communities, but the projects are not economically feasible on their own. Extension of service to these communities will require some sort of contribution from others, over and above the direct contributions from those requesting service. Even communities that currently have gas, like Homer, could not have been served without contributions from others. Other solutions need to be explored to bring gas to these communities. Q. Please describe ENSTAR s safety and service record. Docket No. U-1- : June 1, 01 Page 1 of

17 A. ENSTAR s safety record is excellent and its response time to reported incidents is typically at or near the first quartile of the AGA best practice standards. For years, ENSTAR has developed its system with safety and reliability as its leading core values. The Company prioritizes expediency in responding to leaks on its natural gas system. While the industry standard allows for certain types of leaks to be logged, classified by magnitude, and monitored, ENSTAR does not tolerate leaks and expediently remedies problems as they are identified. This practice helps not only to ensure the ongoing safety of our customers and communities, but also helps keep ENSTAR s lost and unaccounted-for gas well below the industry average. Leak control is a prudent operating policy for many reasons, including mitigating the risk of gas migration where heavy frost conditions could result in lost gas finding its way under frost and into buildings, with obvious safety risks. ENSTAR has also installed automated meter reading devices throughout its service area and continues to analyze efficiencies that promote safe and reliable service. ENSTAR s operations are regulated and routinely audited by the Pipeline and Hazardous Materials Safety Administration ( PHMSA ). In addition to numerous operations, maintenance, and construction requirements, ENSTAR continues to comply with newer PHMSA regulations, such as Pipeline Integrity Management and Distribution Integrity Management. ENSTAR has a detailed Pipeline Integrity Management Plan that it developed in 00 following the Pipeline Safety Improvement Act of 00. ENSTAR began completing integrity assessments of its transmission pipelines in 00, and by 01 it Docket No. U-1- : June 1, 01 Page 1 of

18 had completed applicable baseline integrity assessments. ENSTAR continues to assess its transmission pipelines each year. These assessments provide valuable information about the condition of the pipelines and help ENSTAR ensure safe and reliable operations. ENSTAR has a similar Distribution Integrity Management Program that was developed following the passage of the Pipeline Inspection, Protection, Enforcement, and Safety Act of 00. Under this program, ENSTAR evaluates risks and threats to its distribution system, documents and monitors performance, and takes proactive measures to replace portions of its distribution system. ENSTAR also installs excess flow valves on many newly constructed residential service lines. ENSTAR attempts to deal quickly and fairly with all consumer requests and complaints and has received feedback from customers that its record and responsiveness is the best of utilities in its service area. Q. What value does ENSTAR provide to the community? A. Since, ENSTAR s number one priority has been to provide safe, reliable natural gas service to its customers in Southcentral Alaska. It has accomplished this through ongoing investments in its natural gas distribution and transmission systems; a focus on excellence in its performance of maintenance of all of its system; and an unrelenting focus on safety and reliability. Our customers have come to expect the convenience of simply turning up their thermostat and the natural gas being there. The existence of this affordable and convenient source of energy for space heating, cooking, and other commercial and residential uses has helped propel the economic development of Southcentral Alaska. Docket No. U-1- : June 1, 01 Page 1 of

19 Q. How does ENSTAR provide this value to the community? A. ENSTAR does so by prudently investing capital to ensure its system is regularly maintained and improved upon; employing a lean and cost-effective workforce; and continually emphasizing safety in every facet of its operations. Q. Have ENSTAR s costs to safely and reliably operate and maintain its system increased since its last rate case? A. Yes. ENSTAR s operations and maintenance ( O&M ) expenses in the last test year, 01, were approximately $0. million. This includes administrative and general expenses, but does not include depreciation or property taxes. Since then, O&M expenses have increased to $. million in the 01 test year, mainly due to labor inflation, including contracted union wage increases and increasing health care costs; safety-related costs with increased PHMSA regulation regarding pipeline integrity; increased costs for employee operational qualification testing; and additional personnel to monitor compliance efforts and regulatory changes. Q. Notwithstanding these modest increases in O&M costs, how does the cost of ENSTAR s service compare to the cost of natural gas service in other jurisdictions in the United States, exclusive of gas commodity cost? A. ENSTAR provides natural gas delivery service to our customers at one of the lowest costs in the entire country. Following approval of this rate application, the cost of natural gas delivery service (combining the customer charge and the service charge, and excluding gas commodity costs) for ENSTAR s G1 Gas Sales customers will be $.0 per Mcf. This is well below the national average cost for natural gas distribution service during 01 as reported by the Energy Information Docket No. U-1- : June 1, 01 Page 1 of

20 Administration of $.1 per Mcf. The Company takes tremendous pride in our safety and reliability record and the fact that our costs for transmission and distribution service are lower than almost all state and national averages. Q. Has ENSTAR done an analysis of the historical rate of increase in its residential base rates (exclusive of gas costs)? A. Yes, and it shows an increase of approximately 0.% per year since 1. Q. How did ENSTAR conduct this analysis? A. ENSTAR compared 01 rates to 1 rates using the following methodology: The actual customer charge per month in 1 was $.0, and the actual base ENSTAR rate per CCF was $0.1. Using the current monthly average customer use of 1. CCF, the annual ENSTAR portion of a customer s bill would be $0.1. The 01 customer charge per month is $1.00, and the base ENSTAR rate per CCF is $0.1. Using the same average customer use of 1. CCF, the current annual ENSTAR portion of a customer s bill is $1.01. The current monthly average customer usage was used in both portions of the calculation in order to eliminate changes due to changes in customer consumption habits. This analysis equates to an average increase in residential base rates of 0.% per year since 1. Q. How does that annual rate of increase compare to the overall inflation rate in Anchorage? Docket No. U-1- : June 1, 01 Page 0 of

21 A. The average inflation rate over that same time period is.% per year, using the Anchorage Consumer Price Index from 1 to 01. The Anchorage CPI for 1 is not included, as that was the base year for this analysis, and the Anchorage CPI for 01 is also not included as it has not yet been determined. V. ENSTAR HAS MADE SUBSTANTIAL NEW INVESTMENTS TO SUPPORT SAFETY AND RELIABILITY AND SERVE NEW CUSTOMERS Q. What values drive ENSTAR s investment decisions? A. ENSTAR s operating procedures are based on natural gas transmission and distribution industry standards, best practices, and ENSTAR s expertise operating in Alaska s unique environment. With Alaska s rugged environment and subarctic temperatures, it is critical that ENSTAR prudently maintain its transmission and distribution systems. Approximately,000 customers depend on ENSTAR to keep their homes, businesses, schools, and hospitals warm. ENSTAR takes its obligations very seriously, having invested $0. million in utility plant since the 01 test period of the last rate case. Q. What capital investments has ENSTAR made since its last rate filing test year? A. ENSTAR s prudent investments include the following: installation of a new.-mile transmission pipeline from the CINGSA storage facility to connect directly into the ENSTAR transmission system, creating redundancy of access to CINGSA, saving ENSTAR s customers in the cost to transport gas, and conserving energy by allowing CINGSA s higher pressure gas to flow into the transmission system without the need for pressure decreases and later recompression ($. million); Docket No. U-1- : June 1, 01 Page 1 of

22 replacement of two aging compressors (10 vintage) at Gudenrath to provide the required deliverability of gas from the Kenai Peninsula to Anchorage ($.0 million); replacement of the 0-inch diameter transmission pipeline at the Beluga River crossing after the river bank receded, exposing the original line ($. million); replacement of the Potter Gate Station ( vintage), including the addition of equipment to make the twin 1-inch diameter transmission pipelines across the Turnagain Arm piggable meaning capable of being internally inspected for corrosion, degradation of wall thickness, or other potential risks via inline smart pipeline inspection gauges, or pigs ($. million); replacement of aged stations and pipeline infrastructure in accordance with integrity management requirements; replacement of approximately 0,000 Encoder Receiver Transmitters (ERTs), a packet radio protocol used for automatic meter reading, which had reached the end of their 1-year battery design lives; installation of miles of distribution mains to bring natural gas to more customers; installation of service lines to connect,0 new customers; and the purchase of equipment and general plant to allow ENSTAR s employees to perform emergency response, safety, construction, service, Docket No. U-1- : June 1, 01 Page of

23 maintenance, line locating, leak surveying, atmospheric corrosion, and integrity management activities. Q. Are the investments made by ENSTAR since its last case in service and used and useful to serve ENSTAR s customers? A. Yes. All of the investments that I just described were in service during the test year and are currently being used to provide natural gas transmission and distribution services to our customers. Q. Are the investments made by ENSTAR since its last case reasonable and necessary to provide service and were the investments prudently incurred? A. Yes. ENSTAR only makes investments that are necessary to ensure safe and reliable service to our customers and to provide efficiency in day-to-day operations. Each investment decision is made, first and foremost, with our customers interests in mind, consistent with good utility practices. Each investment I have described is directly related to our core mission and consistent with our core values. Additionally, we work hard to ensure that all investments are made prudently and at a reasonable cost, consistent with our corporate culture and how we operate our business every day VI. ENSTAR S UNIQUE COMBINATION OF RISKS REQUIRES A RATE OF RETURN THAT WILL ADEQUATELY COMPENSATE INVESTORS AND ALLOW ENSTAR TO ATTRACT NEW CAPITAL TO ALASKA 1 Q. What ROE is ENSTAR seeking? A. ENSTAR is requesting an ROE of 1.%, which is the same as our most recently adjudicated ROE. Our request for a 1.% ROE is consistent with the recommendation of ENSTAR witness Robert B. Hevert, whose direct testimony provides a recommended range of ROE for ENSTAR of between 1.0% and Docket No. U-1- : June 1, 01 Page of

24 %. For a variety of reasons, which I will discuss and which are also discussed in the direct testimony of Mr. Hevert, ENSTAR is a unique transmission and distribution utility operating in an increasingly challenging environment. Q. What is your basis for requesting this ROE? A. An ROE of 1.% is near the low end of Mr. Hevert s recommended range, which reflects that ENSTAR consists of both transmission and distribution systems, the current capital market risks faced by all companies, and the specific risks unique to ENSTAR. Maintaining the status quo with respect to ROE will help ensure ENSTAR s continued ability to attract new capital and send appropriate signals to debt and equity investors that Alaska is still a good place to invest. ENSTAR was able to attract the capital required to finance its necessary investments in 01 and 01 with the previously-approved 1.% ROE, and I believe that it is important to maintain that ROE to attract investment going forward at a reasonable cost. The requested 1.% ROE is a rate of return at which I am confident that ENSTAR can obtain the equity capital to fund the required investments to ensure safe, reliable service and connect new customers to our system. Energy capital markets have become constrained in recent months with the downturn in world oil, natural gas, and natural gas liquids prices, which puts significant pressures on an energy company s ability to attract investment capital. In other words, with the downturn in energy markets, it has become more difficult to attract debt and equity investments. We do not expect this downturn to reverse in the near term. In addition, 01 and 01 actual earnings for ENSTAR were significantly lower than the allowed 1.% ROE. Docket No. U-1- : June 1, 01 Page of

25 The combination of the downturn in the energy markets, the clear risk and volatility of earnings facing ENSTAR, and the identified market range recommended by Mr. Hevert, which takes into account the unique risks faced by ENSTAR, all support the reasonableness of ENSTAR s requested 1.% ROE. While this ROE provides no guarantee of earnings, it should be sufficient for ENSTAR to continue to fund its necessary investments for safe, reliable service and connect new customers in its franchise areas. Q. Please elaborate on the factors affecting earnings for ENSTAR. A. Over the past few years, returns on invested capital have been strained by Southcentral Alaska s warm weather and also by the timing lag between (a) when the funds are invested and (b) when ENSTAR is able to begin generating revenue from those investments. While these are not the only two factors that may impact income, they are the most prominent items decreasing ENSTAR s earnings on investments it has prudently made in its system. In 01 and 01, ENSTAR generated net income of $. million and $. million, respectively. This contrasts with a calculated net income requirement of $1. million to support a 1.% allowed ROE on ENSTAR s 01 test year rate base as applied for in U-1-1. In addition, of the $0. million invested from 01 to 01, $. million was for non-income producing system betterment and general plant. Non-income producing plant is investment that does not result in nor is intended to significantly increase customer connections. ENSTAR has not earned its return on these non-income-producing investments, and yet ENSTAR has fully Docket No. U-1- : June 1, 01 Page of

26 financed the cost of these investments. These investments will continue to be financed by ENSTAR until its rate case is fully adjudicated by the Commission. Q. Are there other factors that will potentially affect earnings in the near future? A. Yes. The current and prospective local economic conditions in Alaska have a strong potential to affect ENSTAR s earnings. The State of Alaska is facing an imminent budget deficit of upwards of $. billion, requiring unprecedented action by Alaska s leaders to increase state revenue and decrease spending. S&P recently downgraded Alaska s credit rating from AAA to AA+, finding that the state s current budget deficit is unsustainable. The fiscal situation in Alaska is merely indicative of the overall condition of the Alaskan economy. The collapse in oil prices has significantly impeded the oil and gas industry in Alaska. As a result, Alaska s workforce, which is highly dependent on the oil and gas industry, has already seen heightened unemployment in the oil and gas and other related industries. The Alaska Department of Labor & Workforce Development is estimating a loss of,00 jobs for the fiscal year 01 alone. As the Commission is no doubt aware, this is not the first time that Alaska has faced an economic crisis. Alaska survived a major recession in 1 following the completion of the Trans-Alaska Pipeline, due in part to strong commodity prices in the energy and fishing industries. In the mid-late 10s, Alaskans suffered through the worst economic downturn since statehood, when, in 1, oil prices slid to below $ per barrel. Much like the current crisis, state revenues and spending plummeted and jobs were lost at an alarming rate, impacting the housing market and causing material increases in bad debt and uncollectible accounts for ENSTAR. Docket No. U-1- : June 1, 01 Page of

27 The risk to ENSTAR is not limited to bad debt and uncollectible accounts. There is potential for negative impacts on ENSTAR s total customer count as jobs are lost and workers look for other opportunities outside of Alaska. Struggling families and others affected by the economic downturn are likely to shift into conservation mode, which has the potential to reduce consumption of natural gas. Alaska will no doubt survive the current economic crisis, much as it did in the 10s and 10s. State leaders are working hard to address the budget deficit and reform the Alaskan economy. But the current challenges are real, and investors will consider them when deciding where to put their money. These factors should be considered by the Commission in establishing an ROE for ENSTAR that will allow it to successfully attract new capital, as it has since its last rate filing in 01. Q. Please elaborate how ENSTAR s earnings are affected by the time lag between (a) when funds are invested and (b) when ENSTAR is able to fully generate revenue from those investments. A. ENSTAR s financing costs, both debt and equity, begin immediately when investors provide capital to ENSTAR. Yet, revenue associated with the majority of these investments lags significantly behind the date of investment. The lag exists due to the fact that utility rates in Alaska are set based on historical test years and also due to the expanded statutory timeline for rate cases in Alaska. Additionally, ENSTAR does not have a capital investment tracker mechanism, which is a feature employed in many jurisdictions. Finally, the use of a 1-month average rate base in ENSTAR s rate cases further exacerbates the lag problem because it ignores actual investments that have been made and placed in service during the test year. As a result of these lag Docket No. U-1- : June 1, 01 Page of

28 risks, revenue will not be generated for most of ENSTAR s investments until many years after the investments are made. While all utilities experience lag to some extent, the combination of factors that I have described make revenue lag a serious risk for ENSTAR that investors will consider. From a net present value or an internal rate of return perspective, delays in revenue generation have significant negative impacts on the actual returns for an investment. The following is a real example for ENSTAR. In spring 01, ENSTAR spent $. million replacing a section of the Beluga pipeline after the bank of the Beluga River had eroded away, leaving the pipeline exposed. The funds for this project were fully deployed in early 01 and the asset was in service by May of that year, helping to safely deliver gas to ENSTAR s customers. ENSTAR, however, generated zero revenue from this capital investment in 01. Indeed, ENSTAR will not be able to fully recover the financing costs of this investment until late 01, when final rates are set. In this case, there will be almost. years between the time when the funds were released and spent by ENSTAR and when it can recover its costs in rates. The delay between the investment date and the date when ENSTAR can generate revenues from those investments means the real ROE available to ENSTAR for its investments is much lower than the allowed ROE ENSTAR has requested in this rate case. As Mr. Dieckgraeff discusses in his testimony, Regulatory Research Associates has concluded that: In a construction cycle, when new capital spending is Docket No. U-1- : June 1, 01 Page of

29 outpacing depreciation, this timing mismatch is perhaps the single largest contributor to a utility s failing to earn its authorized ROE. Q. How is ENSTAR treating revenue generated in the test year from capital investments made in 01 in its rate application? A. There are two types of capital investment that ENSTAR made in the 01 test year: (1) revenue generating investments and () non-revenue producing system betterment and general plant investments. 1. For revenue generating investments such as new mains, service lines, and meters to connect new customers, ENSTAR is generally able to generate revenue in the year the investment is made. As detailed in Mr. Dieckgraeff s testimony, we are making adjustments to revenue in this rate case to reflect the full year of revenue, which properly matches test year revenues to the year-end capital.. For non-revenue producing system betterment and general plant investments, no revenue was generated on the investments during the 01 test period. These assets are fully in service at the start of the rate effective period, customers are benefiting from these assets, and ENSTAR has 0% financed these assets prior to the start of the rate effective period. As shown in Mr. Dieckgraeff s testimony, we are reflecting these investments as test year-end capital. Q. Why is ENSTAR proposing to use a 1-month average rate base for its interim and refundable increase, while proposing a test year-end rate base for its permanent rates going forward? Regulatory Focus, pp. -, January 1, 01. Docket No. U-1- : June 1, 01 Page of

30 A. The rate base reflected in ENSTAR s rate application reflects the capital invested by ENSTAR as of December 1, 01, the end of the 01 test year. The first interim and refundable rate increase for ENSTAR from the last rate case was effective January 1, 01. Final rates in this case are not expected to be put in place until late 01, both periods being after the full capital was invested and the assets were placed into service for the benefit of the customers. As discussed by Mr. Dieckgraeff, utilizing a test year-end rate base properly matches the rates with the financing costs and depreciation of the assets. As further discussed by Mr. Dieckgraeff, synchronization of revenues from new business during the test year has been completed and presented in the present filing. As per the Commission s long-standing policy, however, utilities must use a 1-month average rate base for the interim and refundable increase. ENSTAR has prepared this calculation for the purposes of the interim and refundable increase. To note, during the interim period, ENSTAR will be incurring full financing costs for the capital deployed and the customers will be benefitting from full use of the assets, but rates will only reflect a 1-month average of the investments. This further illustrates the cost to ENSTAR of the time lag between when funds are invested and when ENSTAR is able to begin generating revenue from those investments. Q. If the Commission adopts the Company s proposal to use test year-end rate base for permanent rates going forward rather than the 1-month average rate base, will that mitigate the lag risk to which ENSTAR is exposed? A. Not entirely. Adoption of test year-end rate base will relieve some of the lag risk, but for the reasons that I discussed previously and that Mr. Hevert addresses in his Docket No. U-1- : June 1, 01 Page 0 of

31 testimony, ENSTAR will still have substantial revenue lag as compared to most other utilities in the Lower. Q. Besides regulatory lag, are there any other important factors that the Commission should consider in setting a fair and compensatory rate of return for ENSTAR? A. Yes. ENSTAR is a unique utility in many respects. Investors understand the unique risks that ENSTAR faces and make investment decisions based upon those risks. I have already discussed a number of these risks, including that we operate both transmission and distribution systems, our unique regulatory lag, the downturn in the energy markets and resulting impacts on economic growth in Alaska, and certain other unique features that make operating a utility in Alaska challenging. Other risk factors are discussed throughout the Company s direct testimony filed in this case, and include risk associated with weather variations due to ENSTAR s lack of a weather normalization mechanism and ENSTAR s natural gas supply risk given its limited supply options. Q. What is the nature of ENSTAR s natural gas supply risk? A. ENSTAR has partial commitments to meet its gas supply through 0, all of which are sourced from the only economically available supply basin Cook Inlet and most of which comes from one dominant producer. The short duration of these gas supply commitments contrasts with ENSTAR s obligation to serve its existing customers, which is without time limit. This is further contrasted with the investments ENSTAR made to serve those customers its most recent plant investments won t be fully recovered until after 0. Docket No. U-1- : June 1, 01 Page 1 of

32 1 1 In contracting for the period after 01, when all of its existing contracts expire, ENSTAR sought to ensure a significant portion of its gas supply portfolio would be from non-dominant producers in order to diversify ENSTAR s supplier risk and to ensure a market exists for smaller producers to continue to invest in the region. While ENSTAR has aimed at diversifying its suppliers, there are only a handful of potential suppliers in the Cook Inlet, which makes real diversification impossible. Further, ENSTAR cannot easily geographically diversify because Cook Inlet is not connected to any external supply pipeline or other producing area. Q. Has the Commission historically recognized these risks in adjudicating ENSTAR s previous rate cases? A. Yes, as discussed in Mr. Hevert s testimony, each time the Commission has adjudicated ENSTAR s ROE, it has granted an ROE that is higher than the national average for natural gas utilities. 1 VII. CONCLUSION 1 1 Q. Does this conclude your direct testimony? A. Yes it does. Docket No. U-1- : June 1, 01 Page of

33 Jared B. Green EMPLOYMENT AltaGas Ltd. and SEMCO Energy, Inc , 00-Present President (ENSTAR Natural Gas Company and Alaska Pipeline Company) President (Cook Inlet Natural Gas Storage Alaska, LLC) Vice President and Corporate Controller, AltaGas Ltd. Vice President Controller and Corporate Secretary, AltaGas Utility Group Inc. Director Strategic Development, AltaGas Utility Group Inc. Team Leader Corporate Reporting and Controls, AltaGas Ltd. Enterra Energy Trust Manager Financial Reporting Eagle Energy Marketing 00 Director Risk Control Forzani Group Limited Senior Financial Analyst Deloitte & Touche LLP Senior Associate EDUCATION University of Calgary: Bachelor of Arts, Economics, 1 University of Saskatchewan: Bachelor of Commerce (distinction), Accounting, 1 Institute of Chartered Professional Accountants of Alberta, 00 OTHER Western Energy Institute Board of Directors Various Officer and Board of Director positions within the AltaGas organization Docket U-1- Exhibit JBG-1 Page 1 of 1

34 Map of ENSTAR System Other Natnrm Cta s Systems - Natwal Gas Systems OWnl!d By Prodl.lCt!r.. GasFlelds C 0 0 ' AnchorPoin Docket U-1- Exhibit JBG- Page 1 of 1