Mark R. Thompson Manager, Rates & Regulatory Affairs Tel: 0.1. Fax: 0.1.1 Email: Mark.Thompson@nwnatural.com December 0, 0 NWN Advice No. OPUC -1 VIA ELECTRONIC FILING AND PERSONAL DELIVERY Public Utility Commission of Oregon 0 Capitol Street, NE, Suite 1 Post Office Box 1 Salem, Oregon 0-1 Attention: Filing Center Re: UG 1 Application of NW Natural for a General Rate Revision Northwest Natural Gas Company, dba NW Natural ( NW Natural or Company ), files herewith its Application for a General Rate Revision. An original and thirty (0) copies of the Application and sets of work papers are included pursuant to OAR 0-001-010(). Included with the Company s Application is Tariff P.U.C. Or. (See NWN/100 and NWN/101), which will replace in the entirety the currently effective Tariff P.U.C. Or.. The proposed Tariff is stated to become effective with service on and after February 1, 01. The Company s responses to the Standard Data Requests required pursuant to OAR 0-0-001(1)(i) are accessible to the Commission in electronic form on an.ftp site. The Company has also posted on this.ftp site copies of this Application in its entirety. The Company will provide.ftp access information to Commission Staff in a separate communication. This filing requests a general rate increase in the Company s Oregon revenues of $. million, an increase of six percent. The proposed increase is $. million, an increase of four percent, when the decoupling deferral of $1.1 million already in current customer rates is taken into account. The executive summary required by OAR 0-0-001 is attached. If approved, this filing would impact customer bills as follows: Rate Schedule Current Average Monthly Bill Proposed Average Monthly Bill Change in Average Monthly bill ($) Change in Average Monthly Bill (%) Schedule 1- Residential $.1 $. $..% Schedule 1 - Commercial $.0 $. $..1% Schedule - Residential $. $0.0 $.1.0% Schedule - Commercial $1.1 $.1 $1.0.% Schedule - Industrial $1,10. $1,1. $0..% Schedule 1 Firm Sales commercial $,0. $,1.1 $1.0.% Schedule 1 Firm Transportation Commercial $1,00.1 $1,0.1 $.0 0.% Schedule Interruptible Transportation Service $,. $,1. ($.) (.%)
1 1 1 1 1 1 1 0 1 In the Matter of BEFORE THE PUBLIC UTILITY COMMISSION OF OREGON NORTHWEST NATURAL GAS COMPANY Application for a General Rate Revision. UG 1 I. INTRODUCTION of this Commission. NW Natural has approximately,000 customers, consisting of Page 1 - NW NATURAL S EXECUTIVE SUMMARY NW NATURAL S EXECUTIVE SUMMARY Northwest Natural Gas Company ( NW Natural or Company ) is filing a general rate increase with the Public Utility Commission of Oregon ( Commission ), pursuant to ORS.0,.1 and.0, to revise its schedules of rates and charges for natural gas service in Oregon to become effective with service provided on and after February 1, 01. With this filing, the Company requests a revision to customer rates that will increase the Company s annual Oregon jurisdictional revenues by $. million, for an increase of. percent over revenues from current customer rates. The increase is $. million, about a four-percent increase, when the decoupling deferral of $1.1 million already in customers current rates is taken into account. In addition, the Company is proposing an environmental cost recovery mechanism that would result in an additional increase to rates. The revised rates produce revenues necessary to sustain the provision of safe, reliable, and low-cost natural gas service to customers in Oregon, while preserving the Company s ability to attract capital for future investments. The Company files this Executive Summary in accordance with OAR 0-0-001. II. BACKGROUND NW Natural is an Oregon corporation whose principal place of business is 0 NW Second Avenue, Portland, Oregon, 0. NW Natural is a public utility providing natural gas service in Oregon within the meaning of ORS.00, and is subject to the jurisdiction
approximately,000 residential,,000 commercial, and 1,000 industrial customers. Approximately 0 percent of NW Natural s customers are located in Oregon and percent are located in Washington. Communications regarding this filing, including data requests issued to the Company, should be addressed to: 1 1 1 Mark Thompson NW Natural 0 NW Second Avenue Portland, OR 0-1 Telephone: (0) 1- Facsimile: (0) 1-1 Email: mark.thompson@nwnatural.com E-Filing NW Natural 0 NW Second Avenue Portland, OR 0-1 Email: e-filing@nwnatural.com Lisa Rackner McDowell Rackner & Gibson PC 1 SW th Avenue, Suite 00 Portland, OR 0 Telephone: 0-- Facsimile: 0-- Email: lisa@mcd-law.com 1 1 A. The Test Year III. CASE SUMMARY 1 1 0 1 The Company s test year in this case is the twelve months ending October 1, 0 ( Test Year ). NW Natural provides information for a historical base period of twelve months ending December 1, 0 ( Base Period ), and makes adjustments to that information to reflect the forecast Test Year. In order to meet the legal requirement that rates be fair, just, reasonable, and sufficient, the Company has selected a test year that closely reflects the investment and expense levels that will exist during the time that the rates adopted in this case are expected to be in effect. The new rates are filed with a requested effective date of February 1, 01. Assuming the addition of the full nine-month statutory suspension period Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 to the 0-day effective date now contained in the tariffs, the new rates would become effective November 1, 01. B. Return on Equity The Company s current return on equity (ROE) is. percent, as established in the Company s last Oregon general rate case, Docket UG 1 ( 00 Rate Case ). In this case, the Company seeks an ROE of. percent. This request is necessary to maintain the financial integrity of the Company while ensuring its ability to provide safe, efficient, and reliable service to its Oregon customers with minimal rate impact. At current rate levels, the Company s ROE in the Test Year would be. percent. C. Factors Driving Rate Adjustment 1. Compliance with Safety Requirements One of the key factors driving NW Natural s need for a rate increase is the implementation of new safety regulations that require the Company to increase its workforce and expenditures for pipeline inspection and maintenance. Federal safety requirements have become more stringent over the last several years and will continue to do so. To respond to the existing and expected heightened safety standards, the Company has incurred, and will be incurring additional operations and maintenance (O&M) expenses and capital costs over the levels currently reflected in rates. Increases in O&M resulting from safety requirements account for $.1 million, or percent, of the Company s proposed $. million revenue requirement increase in this case. In addition, much of the increase to rate base in this case is related to the safety-related investments.. Enhanced Customer Service While NW Natural s overall customer satisfaction is high, the Company is proposing specific improvements in this case to respond to customer needs. In response to customer feedback, NW Natural proposes to make capital investments and to increase O&M expenditures in order to provide four-hour service appointment windows to residential and Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 small commercial customers. The proposed change is intended to respond to customer feedback that the current system of assigning service technicians to respond to customer calls between :00 a.m. and midnight is burdensome to customers. In addition, the Company proposes to provide customers with new no-fee options for paying bills. O&M expenses associated with these customer service initiatives account for $.1 million, or 1 percent, of the Company s proposed $. million revenue requirement increase in this case.. Company Contributions to Pension Funds While the Company s pension funds have been closed to new hires since 00 in the case of non-bargaining unit employees and 0 in the case of bargaining unit employees, the Company has continuing obligations to fund pension plans for participating employees. Recent changes in the federal pension laws and conditions in the financial markets over the past several years have required NW Natural to make significant cash contributions to its employees pension plans well in excess of the amounts recovered in rates. As a result, the revenue requirement in this case reflects recovery in rate base of the cash contributions that the Company has made above what has been or would be collected in rates absent the Company s proposed rate base treatment. The Company s proposed recovery of cash contributions to pension plans accounts for $. million, or percent, of the Company s proposed $. million revenue requirement increase in this case. D. Cost Control Efforts The rate request in this case reflects the Company s efforts since the 00 Rate Case to aggressively manage its costs, while continuing to provide safe and reliable service. Beginning in 00, the Company instituted a number of initiatives intended to hold down capital and operating costs. The most significant of these initiatives was the complete restructuring of the Company s business units known at NW Natural as the Operations Model. Through the Operations Model, the Company centralized its operations to focus on Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 the core processes of acquiring and serving customers. The Operations Model resulted in the Company outsourcing much of the field work consisting of more basic and highly repetitive tasks, allowing the Company to eliminate a number of full-time employee equivalent positions (FTEs). The Company retained FTEs for more challenging and complex construction activities, resulting in a leaner and highly-trained field workforce. During the Operations Model reorganization, the Company also reviewed and restructured its non-operating areas through a Business Services Efficiency Review (BSER). The Operations Model and BSER reduced FTEs by about 00 FTEs. The second initiative the Company instituted to reduce costs was Automated Meter Reading (AMR). In 00, NW Natural learned that its joint meter reading agreement with Portland General Electric Company (PGE) would likely be discontinued because PGE was considering a plan to institute advanced meter reading. Shortly thereafter, the Company began instituting AMR in the parts of its service territory that did not overlap with PGE s. In 00, PGE informed NW Natural that it would end the joint meter reading agreement. The Company determined that instituting AMR throughout its service territory, although more expensive than the joint meter reading with PGE, would be less expensive than returning to manual meter reading. Instituting AMR resulted in a reduction of meter reading positions. Finally, the Company instituted the Low Growth Initiative in 00. The Low Growth Initiative was developed to respond to slowing growth in the Company s number of customers. For two decades the Company experienced customer growth in excess of three percent per year, but growth started slowing in 00 and has been less than one percent per year since 00. The Company instituted a program to reduce an additional 0 FTEs over those reduced through the Operations Model and BSER to respond to this lower customer growth. Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 In addition to the three specific initiatives discussed above, the Company has taken additional actions to manage its costs. The Company addressed increases in the costs associated with employee benefits and salaries on a number of fronts. The Company closed its defined benefit pension plans and retiree medical benefits to new employees. The Company also increased employees health care sharing percentage and capped the Company s contribution towards bargaining unit employee health care costs. In addition, in 00 the Company eliminated salary increases for officers and constrained salary increases for non-bargaining unit employees to below-market levels. The Company also managed costs by ensuring that the Company maintained strong credit ratings during the recent financial downturn. The Company s credit ratings have allowed it to access capital markets at very favorable rates even during the most difficult times of the financial crisis. To help maintain these strong ratings, the Company recently issued new debt to reduce interest costs. The Company s proposed ROE balances the Company s need to maintain these strong credit ratings with the need to limit the requested rate increase in this case. Finally, the Company has made efforts to keep gas commodity costs, a significant portion of customers rates, low. Combined with the other efforts described above, commodity costs have helped keep average customer bills to levels that are below what they were in 00, even after the increase proposed in this filing. The three initiatives and other cost control measures described above helped to keep the Company s costs much lower than they would have been absent the measures. Between 001 and 00, the year before the Operations Model was implemented, total O&M increased from $. million to $1. million a compound annual growth rate (CAGR) of. percent. After implementation of the Operations Model in 00, O&M grew at a significantly lower CAGR of. percent between 00 and the Test Year. If the pre- Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 Operations Model growth rate of. percent had persisted through the Test Year, O&M would have been $1 million, rather than the $ million forecast in this case. The Company has implemented its cost controls without compromising the safety or reliability of its service, as demonstrated by the Company s excellent record of safety and reliability. The Company s customer service metrics are higher than they have been in the past, with the Company placing first or second in J.D. Powers and Associates customer satisfaction surveys in each of the last five years. The increase in the Company s revenue requirement in this case includes costs associated with furthering the Company s goals of providing safe and reliable natural gas service and achieving high levels of customer satisfaction. E. Other Issues Addressed in Filing In addition to the factors driving the rate increase described above, the testimony addresses other important policy and financial considerations. These include proposing a mechanism to recover costs associated with environmental remediation that have, to date, been deferred for collection, as well as proposing a modification to the Company s current rate design. Under the proposed rate design, the monthly customer charge for residential and certain commercial customers would be increased, with a corresponding decrease to those customers volumetric charges. The proposed rate design will more closely match the recovery of the Company s fixed costs with fixed charges on customers bills, and more closely align the collection of variable costs with the volumetric charge on customers bills. 1 IV. TESTIMONY SUMMARY The Company s direct case consists of the testimony and exhibits of 1 witnesses: In NWN/0, Gregg Kantor, President and Chief Executive Officer, provides a general overview of the case and introduces the Company witnesses and briefly describes their testimony; Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 In NWN/00, David H. Anderson, Senior Vice President and Chief Financial Officer, summarizes the Company s request for a rate increase, including the key drivers of the requested rate increase, the risks of NW Natural s business, and proposes the return on equity to be applied in this case; In NWN/00, Natasha Siores, our Revenue Requirement and Regulatory Consultant, and Kevin McVay, our Business Development Consultant, present the Company s proposed revenue requirement; In NWN/00, Stephen Feltz, Treasurer and Controller, discusses the Company s capital structure and cost of capital proposal, and also discusses the Company s proposal for recovery of its cash pension contributions required by the Pension Protection Act that are not included in the Company s current FAS expenses; In NWN/00, Samuel Hadaway, our consultant from FINANCO, Inc., presents his recommendation for an appropriate range for return on equity; In NWN/00, Grant Yoshihara, Vice President of Utility Operations and Chief Engineer, discusses several planned capital additions, modifications to the Company s System Integrity Program and additional operations and maintenance expenses required in response to changing federal safety regulations, the work the Company plans for their implementation, and research and development; In NWN/00, John Sohl, Business and Budget Manager, discusses our O&M and capital expenditures for the test year. In NWN/00, Lea Anne Doolittle, Senior Vice President, explains the costs related to compensation and benefits included in the case, and a safety training and business continuity facility that the company is purchasing and developing; Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 In NWN/00, David Williams, Vice President of Utility Services, presents the Company s proposals to improve customer service, including implementation of morning and afternoon service windows, and no-fee bill payment options; In NWN/00, Kimberly Heiting, Chief Communications Officer, presents the Company s proposed plan for customer communications for the test year; In NWN/10, Russell Feingold, our consultant from Black & Veatch Corporation, presents a long-run incremental cost study and the Company s proposal for changes to its rate design; In NWN/100, Natasha Siores, our Revenue Requirement Regulatory Consultant discusses the Company s proposed changes to its current rate mechanisms; In NWN/00, Robert J. Wyatt, Environmental Manager, describes the federal and state environmental actions that define the scope of the Company s environmental remediation obligations; In NWN/100, Sandra K. Hart, Director of Risk and Land, describes the Company s efforts in pursuing insurance recovery for its environmental remediation obligations; In NWN/100, C. Alex Miller, Vice President of Finance and Regulation and Assistant Treasurer, describes the rate mechanism by which the Company proposes to recover its environmental remediation costs; In NWN/100, Andrew Middleton, our consultant from Corporate Environmental Solutions, LLC, explains historical manufactured gas operations as well as the Company s operations that resulted in its environmental remediation obligations; and In NWN/100, Onita King, Tariffs and Regulatory Consultant, describes and presents the Company s proposed tariffs. Page - NW NATURAL S EXECUTIVE SUMMARY
1 1 1 1 1 1 1 0 1 Exhibit A Summary of Requested General Rate Increase Oregon Jurisdiction Filed December 0, 0 Total Revenues Collected Under Proposed Rates: $,,000 Revenue Change Requested: $,,000 Revenues Net of any Credits from Federal Agencies: $,,000 Percentage Change in Revenues Requested:.% Percentage Change in Revenues Net of any Credits from Federal Agencies:.% Test Period: November 1, 01 to October 1, 0 Requested Rate of Return on Capital:.% Requested Rate of Return on Equity:.% Proposed Rate Base: $,,000 Results of Operation 1 Before Proposed Rate Change Utility Operating Income: $,,000 Average Rate Base: $,0,000 Rate of Return on Capital:.% Rate of Return on Equity:.1% After Proposed Rate Change Utility Operating Income: $1,,000 Average Rate Base: $,,000 Rate of Return on Capital:.% Rate of Return on Equity:.% Bill Effect of Rate Change on Each Customer Class Schedule 1 - General Sales Service: Residential.% Schedule 1 - General Sales Service: Commercial.1% Schedule - Residential Sales Service.0% Schedule - Basic Firm Non-Residential Sales Service: Commercial.% Schedule - Basic Firm Non-Residential Sales Service: Industrial.% Schedule 1 - Gas Light Service (FROZEN) cancelled Schedule 1: Non-Residential Firm Sales Service: Commercial.% Schedule 1: Non-Residential Firm Transportation Service: Commercial 0.% Schedule 1: Non-Residential Interruptible Sales Service: Commercial 0.0% Schedule 1: Non-Residential Firm Sales Service: Industrial 0.0% 1 Based upon the Company s 0 Report of Operations. Based upon the Company s 0 general rate case filing. Page - NW NATURAL S EXECUTIVE SUMMARY
Schedule 1: Non-Residential Firm Transportation Service: Industrial 0.0% Schedule 1: Non-Residential Interruptible Sales Service: Industrial 0.1% Schedule : Large Volume Non-Residential Firm Sales Service: Commercial 0.0% Schedule : Large Volume Non-Residential Firm Sales Service: Industrial 0.0% Schedule : Large Volume Non-Residential Transportation Service: Firm Service 0.0% Schedule : Large Volume Non-Residential Interruptible Sales Service: Commercial 0.0% Schedule : Large Volume Non-Residential Interruptible Sales Service: Industrial 0.0% Schedule : Large Volume Non-Residential Transportation Service: Interruptible Service -.% Schedule : High Volume Non-Residential Firm and Interruptible Transportation Service 0.0% 1 1 1 1 1 1 1 0 1 Page 1 - NW NATURAL S EXECUTIVE SUMMARY