PRE.-FILED DIRECT TESTIMONY OF. Denise Kay Parrish

BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING IN THE MATI ER OF THE COMMISSION ) INVESTIGATION UPON ITS OWN MOTION ) TO DETERMINE WHETHER SOURCEGAS ) DISTRIBUTION, LLC IS EXCEEDING ITS ) Docket No. 30022-192-GI-12 AUTHORIZED RATE OF RETURN, SUCH ) Record No. 13200 THAT ITS RATES ARE NOT JUST AND ) REASONABLE, AND ORDER TO SHOW ) CAUSE WHY ITS RETAIL RATES SHOULD ) NOT BE REDUCED ) PRE.-FILED DIRECT TESTIMONY OF Denise Kay Parrish On Behalf of the Office of Consumer Advocate Testimony Filed: September 17, 2012 Hearing Begins: October 31, 2012

1 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 2 A. My name is Denise Kay Parrish and my business address is 2515 Warren Avenue, Suite 3 304, Cheyenne, Wyoming 82002. 4 5 Q. WHAT IS YOUR OCCUPATION? 6 A. I am currently the Deputy Administrator of the Wyoming Office of Consumer Advocate 7 (OCA). In this position, I review and provide input into the recommendations made by 8 the OCA. I review utility applications filed with the Wyoming Public Service 9 Commission (Commission) and provide advice to the Administrator regarding the 10 involvement the OCA should have, if any, in the various cases. I review applications, 11 perform analyses and provide recommendations to the Commission relative to various 12 utility matters, including revenue requirements, tariff language, competitive issues, rules 13 and regulations, and other items. I perform special studies, as well as provide 14 information and research to customers, the legislature, the OCA Administrator, and 15 others. I do other assignments and tasks, as needed and as assigned by the OCA 16 Administrator. 17 18 Q. WHAT IS YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND? 19 A. In 1976, I graduated from Michigan State University with a Bachelor of Arts degree in 20 Accounting. I have spent more than thirty-five years as a regulator of public utilities, 21 having been on the staff of four state utility regulatory commissions and two consumer 22 advocate entities. More than twenty of these years have been spent at the Wyoming 23 Public Service Commission, some with the Rates and Pricing Section (now part of the 24 technical advisory staff) and some with the Office of Consumer Advocate. I have taken 25 classes related to various aspects of public utility regulation, including income taxes, 26 regulatory accounting, capital recovery, cost-of-service, rate design, revenue 27 requirements, separations and allocations, and other specialized topics. I have taught 28 classes on issues of accounting standards, general ratemaking principles, affiliate 29 transactions, regulatory accounting, financial reporting, and other specialized topics to 30 regulatory professionals. 31 Direct Testimony of Denise Kay Parrish I Docket No. 30022-192-GI-12

4 International Relations. I am a member of the National Association of State Utility 3 Regulatory Utility Commissioners Staff Subcommittees on Accounting and Finance and Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-12 2 31 information to the Commission relative to the current earnings level. 30 rate of return and the likely sustainability of the current earnings level. I also provide 27 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 28 A. The purpose of my testimony is to offer an opinion as to whether SourceGas 29 Distribution, LLC (SourceGas) is currently earning in excess of its currently authorized 22 A. As a member of the Office of Consumer Advocate, I represent the interests of Wyoming 26 23 citizens and all classes of utility customers in this public utility matter, as required by 25 individual, group, municipality, or corporation. 24 W.S. 37-2-401. It is neither my intent nor my charge to represent the position of any 21 Q. WHO DO YOU REPRESENT IN THIS PROCEEDING? 20 15 Board on Universal Service. I have testified in telecommunications, water, wastewater, 13 Wyoming Public Service Commission, the Wyoming Legislature Joint Corporations 12 Commission, the Colorado District Court, the Arizona Corporations Commission, the 11 before the Michigan Public Service Commission, the Colorado Public Utilities 10 A. Yes. I have testified in more than 190 cases before regulatory bodies. I have testified 16 electric, and natural gas cases. The subjects upon which I have testified include revenue 17 requirements, rate design, rates of return, nuclear decommissioning, accounting deferrals, 18 adjustment mechanisms, income taxes, capital recovery, universal service funding, and 19 other specialized topics. 9 Q. DO YOU HAVE EXPERIENCE AS AN EXPERT WITNESS? 14 Committee, the Federal Energy Regulatory Commission, and the Federal-State Joint 8 6 instructor and participant in numerous international and domestic seminars, conferences 7 and meetings, as well as virtual working groups, involving utility regulators. 5 Consumer Advocates (NASUCA) Tax and Accounting Committee, I have been an 2 University Institute of Public Utilities. I am the past chair of the National Association of 1 Since 2002, I have been a member of the program faculty at the Michigan State

1 2 Q. BEFORE PRESENTING YOUR OPINION ABOUT SOURCEGAS CURRENT 3 EARNINGS LEVEL, PLEASE PROVIDE SOME CONTEXT FOR THIS 4 MATTER. 5 A. Stating the obvious, one of the Commission s primary roles pursuant to Wyoming statute 6 is to establish just and reasonable rates to be charged by public utilities for the provision 7 of service. However, it is not quite so obvious how those rates are to be established, as 8 the courts have clearly stated that there is no one formula to be followed. The 9 Commission considers a variety of factors including, but not limited to: property costs, 10 property values, the use and usefulness of property, revenues, expenses, earnings, 11 geographic location, population, competitiveness of the marketplace, and operational 12 issues. Each of these items may have an impact on whether a rate that has previously 13 been authorized by the Commission remains just and reasonable on a going-forward 14 basis. 15 16 One of the primary tools used to measure the on-going reasonableness of a public utility s 17 rates is to compare the earned rate of return (on rate base or on equity) against the rate of 18 return that was established in the public utility s most recent general rate case. It is 19 common for a utility to argue that its rates must be increased because shareholders or 20 owners are no longer earning a fair return on its investment. The return is a financial 21 metric that has become a focal point of both investors and regulators, since it incorporates 22 through its calculation changes in revenues, expenses, debt and equity ratios, and 23 investments. 24 25 Just as investors and utility management look at returns to determine whether it needs to 26 request an increase in rates, regulators look to the return to determine whether it is 27 appropriate to decrease rates, or to at least limit rate increases that may occur due to 28 various rate mechanism other than general rate cases. Thus, when Commission rule 29 249(a) asks for data that provides a showing of whether granting an increase in 30 commodity costs would result in a normalized rate of return on rate base that exceeds the Direct Testimony of Denise Kay Parrish 3 Docket No. 30022-192-GI-12

4 The information provided by SourceGas in conjunction with its recent commodity 3 23 OCA focused its analyses on comparisons of the numbers from the most recent 25 SourceGas in its testimony in this investigatory proceeding. As a result of our own 27 testimony filed in this case, and multiple discussions with SourceGas personnel 28 (including two one-day long meetings), we identified the following areas as having the 29 most impact on the increase in SourceGas rate of return on rate base since the time of the 22 this investigatory proceeding, rather than using numbers that were less current. Thus, the 24 SourceGas general rate case and the 12 months ended June 30, 2012, as provided by 26 inquiries, our review of the Commission staff s questions and SourceGas responses, the 20 Commission staff expressed in the past several commodity pass-on cases, we determined 6 and reasonable on a going-forward basis. This is the question I focus on in my testimony 1 utility s most recently authorized return, it is seeking information that helps determine the 2 on-going reasonableness of the current rate levels. 5 balancing account applications has raised the question of whether its base rates are just 7 in this proceeding specifically, 8 rates at this time. In the short time that the OCA has had to try to study this question, we 9 focused on what changes are causing current returns to exceed SourceGas most recently 10 authorized Wyoming return on rate base, and is the current level of return likely to 11 continue into the future or is it an unusual, short-term phenomenon? We did not spend 12 our time trying to compute refunds or compute earnings levels for time frames other than 13 current period, as the Commission is prohibited from retroactive ratemaking. However, 14 the Commission certainly has the ability to adjust future rates on 15 permanent basis as a result of the evidence in this proceeding. 16 17 Q. WHAT ACTIVITIES AND ANALYSIS HAS THE OCA UNDERTAKEN IN 18 PREPARATION OF ITS RECOMMENDATIONS IN THIS PROCEEDING? 19 A. While the OCA was aware of the concern about SourceGas earnings level that the 21 it would be prudent to start with the numbers presented by SourceGas in its testimony in 31 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-1 2 4 30 most recent rate case and during the 12 months ended June 30, 2012: either a temporary or a should there be a downward change in SourceGas base

1 Reduction in Bad Debt Expense 2 Reductions to Customer Accounting and Billing Expenses 3 Additional Revenue, Growth in Customers, and Normalized Sales 4 5 I will discuss each of these items in more depth in my testimony below. 6 7 Of course, there have been increases to plant investments, the overall rate base, and the 8 total of the operating expenses. But, the gains in revenues have outpaced the growth in 9 expenses and investment, causing the rate of return on rate base to be greater than the 10 return at the time of SourceGas most recent general rate case. Furthermore, the changes 11 to the corporate and interjurisdictional allocations have reduced the costs assigned to 12 SourceGas Wyoming operations but the impact is small relative to the impact of the 13 three items identified above. 14 15 Q. HAVE YOU PREPARED A SUMMARY OF THE FINANCIAL PIECEPARTS 16 REFERRED TO IN YOUR ANSWER ABOVE? 17 A. Yes. This summary is provided below. 18 19 Table 1: Comparison of Revenue Requirement Calculation 20 General Rate 1 2-Months Ended Case Results June 30, 2012 Difference Rate Base $100,488,596 $107,688,991 $7,200,395 7.2% Return 7.98% 7.98% Required Return $8,014,780 $8,589,070 $574,290 7.2% Adjusted Earned Income $8,014,415 $8,733,317 $718,902 9.0% Excess Income $365 ($144,247) $144,612 Gross Tax Multiplier 1.538462 1.538462 Excess Revenue $562 ($221,918) $222,480 Adjusted Earned Return 7.98% 8.11% 21 22 As shown on Table 1, the rate base increased by about seven percent, increasing the 23 required return by the same percentage. However, the adjusted test year income (shown 24 as earned income) increased by nine percent. This difference in growth rates is what has 25 caused the return to be greater than that authorized in the rate case. 5 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-1 2

1 Taking the analysis one step further, I then examined the growth in revenues and 2 expenses. 3 4 Table 2: Comparison of Revenues and Expenses 5 General Rate 12-Months Case Ended Difference Results June 30, 2012 Base Rate Revenues $35,735,277 $36,774,939 $1,039,662 2.9% Revenue Credits $890,521 $939,547 $49,026 5.5% Other Gas Revenues $770,667 $645,995 ($124,672) (16.2%) TOTAL $37,396,465 $38,360,481 $964,016 2.6% Storage Expense $813,446 $777,721 ($35,725) (4.4%) Transmission Expense $1,759,646 $1,678,770 ($80,876) (4.6%) Distribution Expense $5,316,059 $5,484,518 $168,459 3.2% Customer and Sales Expenses $4,127,254 $3,145,688 ($981,566) (23.8%) Admin. & General Expenses $7,544,393 $7,202,733 ($341,660) (4.5%) Taxes Other than Income $1,113,466 $1,456,309 $342,843 30.8% Depreciation and Amortization $6,005,979 $6,908,141 $902,162 15.0% Income Taxes $2,701,807 $2,973,284 $271,477 10.0% TOTAL $29,382,050 $29,627,164 $245,114 0.8% 6 7 8 9 10 11 12 13 14 15 16 17 18 OPERATING INCOME $8,014,415 $8,733,317 $718,902 9.0% As Table 2 shows, there have been small changes in some account categories and large changes in others, but overall, revenues have increased by about 2.6% while total expenses have increased by less than one percent. Looking at these items another way, revenues have increased by close to $1 million while expenses overall have increased by about one-fourth of that amount. More specifically, even though expenses have increased overall, the customer and sales expenses have decreased by nearly one million dollars. Depreciation expense has increased substantially, but this is easily explainable by the increase in plant that has been placed in service, shown on Table 3. Direct Testimony of Denise Kay Parrish 6 Docket No. 30022- L92-GI-12

7 1 Table 3: Gross Plant in Service including CWIP Comparison 2 General Rate I 2-Months Case Ended Difference Results June 30, 2012 Intangible Plant $512,501 $512,501 $0 Gathering & Processing Plant $0 $224,013 $224,013 Underground Storage Plant $14,686,532 $15,199,531 $512,999 3.5% Transmission Plant $54,526,631 $56,884,498 $2,357,867 4.3% Distribution Plant $112,345,964 $124,169,056 $11,823,092 10.5% General Plant $25,889,010 $29,053,340 $3,164,330 12.2% TOTAL $207,960,638 $226,042,939 $18,082,301 8.7% 3 4 Table 3 shows that the majority of the increase in gross plant is in Distribution Plant. The 5 net plant comparison, shown below on Table 4, shows a slightly different picture. The 6 largest increase in net plant is shown to be in the category of Transmission Plant. Yet, 7 whether one is examining the gross or the net plant, it is clear that the plant balances have 10 8 increased since the time of the last general case, and therefore, are not causes of the 9 increased rate of return that is the subject of the Commission s investigation. 11 Table 4: Net Plant including CWIP Comparison 12 General Rate I 2-Months Case Ended Difference Results June 30, 2012 Intangible Plant $265,297 $253,455 ($11,842) (4.5%) Gathering & Processing Plant $0 $110,785 $110,785 Underground Storage Plant $9,694,400 $10,358,243 $663,843 6.8% Transmission Plant $18,457,168 $29,092,832 $10,635,664 57.6% Distribution P1 ant $59,665,332 $62,089,787 $2,424,455 4.1% General Plant $15,407,561 $12,159,264 ($3,248,297) (21.1%) TOTAL NET PLANT $103,489,758 $114,064,366 $10,574,608 10.2% 13 14 15 Q. 16 17 18 A. 19 WHAT WAS YOUR NEXT STEP IN IDENTIFYING THE THREE INCOME CATEGORIES THAT YOU BELIEVE HAVE THE LARGEST IMPACT ON SOURCEGAS INCREASE IN EARNINGS? The reduction in Customer Accounting and Billing expenses and Bad Debt Expense were identified by SourceGas in its testimony in this proceeding. OCA further explored Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-12

1 each of the items and confirmed the significant impact of each of these items. As to 2 normalized revenues and load growth, there is some information provided on this matter 3 in Mr. Hammer s testimony but the issue became clearer to the OCA once it was 4 provided additional information and additional analysis was performed using historical 5 data. 6 7 Q. PLEASE DESCRIBE THE IMPACT OF THE REDUCTION TO BAD DEBT 8 EXPENSE. 9 A. The pro forma adjustments in this case make the bad debt expense issue appear to be 10 more complicated than it really is, since there are adjustments included to both increase 11 and decrease bad debt during the period of review from the time of the last case to today. 12 But, to boil down all the back and forth, SourceGas has analyzed its bad debt expense and 13 has found that the amount of bad debt being accrued in anticipation of its uncollectible 14 write-offs was greater than the write-offs themselves. In other words, it believes that its 15 bad debt costs on a going-forward basis will be less than the amount of bad debt 16 anticipated at the time that the current rates were established. The pro forma expense for 17 the 12 months ended June 30, 2012 reflects that reduced cost. This assumed reduced bad 18 debt expense makes a lot of sense to the OCA when one considers the reductions to the 19 cost of natural gas that are part of the uncollected customers bills. 20 21 The impact of this change in bad debt is summarized on Mr. Hammer s Exhibit 5, JSH-2, 22 Schedule 1, page 1 of 1. Line 52 of the schedule shows the expenses for Account 904, 23 Uncollectible Accounts. The schedule shows a rate case approved expense of $753,300 24 but a current expense for the time period ended June 30, 2012 of $415,854. This is an 25 expense reduction of $337,446 or about 45% of the rate case established bad debt 26 expense. 27 28 SourceGas has assured me that it is comfortable with the approximately $415,000 being 29 the new bad debt targeted expense for the near term future and that there are no 30 foreseeable plans to raise the bad debt expense accrual. This means that the expense Direct Testimony of Denise Kay Parrish 8 Docket No. 30022-192-GI-12

1 reduction of about $337,000 should be on-going, and should be taken into account as the 2 Commission examines what a reasonable rate level should be on a going-forward basis. 3 4 Interestingly, the $415,000 uncollectible expense target is very similar to the $447,893 5 unadjusted test year amount that was reflected in the documents of the last SourceGas 6 general rate case before the pro forma bad debt expense adjustment was made. As 7 explained in the prefiled testimony of Mr. James Elliott in Docket No. 30022-148-GR-10 8 at page 27, 9 The amount of $447,893 represents the test year uncollectible accounts 10 expense accrual for Wyoming per SourceGas Distribution s books. The 11 calculation of the uncollectible accounts expense to be collected through 12 base rates is shown in Exhibit JME-6. That amount, $757,150, represents 13 an increase of $309,257 and is based upon the proposed revenue 14 requirement (excluding uncollectible accounts expense), the per books 15 purchased gas cost, the test year revenue paid to Choice Gas suppliers, and 16 the expected accrual of 0.75% of total revenue... 17 18 Q. PLEASE DESCRIBE THE ISSUE RELATED TO CUSTOMER ACCOUNTING 19 AND BILLING EXPENSES. 20 A. At the time of the last rate case, SourceGas was in the midst of a change from having a 21 third party contracted customer service and billing operation to an owned, internal 22 customer service center. The test year in that rate case was the 12 months ended August 23 31, 2009. Yet, Mr. Daniel Watson s prefiled testimony in the rate case, at page 20, 24 provides information that the internally operated expanded call center did not begin 25 operation until September 2009. Thus, a full year of actual costs of the new call center 26 was not known at the time of the rate case. 27 28 The adjustment to arrive at the call center and billing costs was described, starting at page 29 27, of Mr. James Elliott s prefiled testimony in the rate case: 30 The pro forma adjustment for implementation of the new billing system 31 and new in-house call center was made in two steps. First, I removed all 32 billing related expenses booked into FERC Account 903 during the twelve 33 months ended August 31, 2009. I then rebuilt the expenses that would go This amount was changed for the final rate calculation to reflect the changes directed by the Commission from SourceGas originally requested application. 9 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-12

3 system and call center were added back to the account; (2) costs that 22 The actual costs compared to the costs assumed at the time of the rate case have resulted 24 and thus should be considered at the reduced expense level as the Commission 26 23 in savings of more than $600,000. This savings, too, seems to be of a permanent nature 25 determines the reasonableness of the current rates. TOTAL $3,072,224 $2,442,828 $2,468,733 Staff Augmentation $1,938 $245,390 $237,264 General Rate Case 201 1 Ended Results Exhibit G June 30, 2012 Billing $1,634,170 $854,215 $871,373 Hardware I Software $0 $35,468 $31,041 Other $74,804 $245,293 $257,966 Labor, Benefits, Payroll Taxes $1,361,313 $1,062,462 $1,071,089 20 4 would be charged due to increased staffing were adjusted based on 2 changed as a result of the implementation of the new in-house billing 1 into that account based on the following: (1) costs that would not be 5 headcount and budget information; and (3) incremental costs resulting 6 from the implementation were added to the account based on headcount 7 and budget information. The total unadjusted amount in Account No. 903 8 was $3,344,199. The pro forma amount resulting from the steps detailed 9 above was $3,087,9262 resulting in a net decrease of ($256,273) to 10 Account 903. 11 12 To summarize, the costs were not known but were reasonably estimated. The actual costs 13 have turned out to be less than the estimate. SourceGas has explained to me that 14 additional efficiencies were able to be achieved at the call center than were originally 15 anticipated, in part due to the experience that its owners have shared with SourceGas 16 about call center operations. Based on information from SourceGas Revised Attachment 17 to CR 2.2, I have created the following cost comparison: 18 19 Table 5: Adjusted Customer Records and Collection Expense (Account 903) I 2-Months 21 2 Mr. Hammer s testimony in the current investigatory proceeding reports that the final computation of current rates resulting from the most recent prior rate case included Account 904 costs of $3,072,224 rather than the requested $3,087,926. See Exhibit 5, JSH-2, Schedule 1, page 1 of 1, line 51. 10 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-01-12

1 Q. WHAT IS THE THIRD OF THE THREE TOPICS THAT YOU HAVE 2 IDENTIFIED AS IMPACTING THE EARNINGS LEVELS IN THIS 3 PROCEEDING? 4 A. The final significant change relates to normalized sales and revenues. As noted earlier, 5 the pro forma adjusted revenues for the 12 months ended June 30, 2012, compared to the 6 rate case test year pro forma adjusted revenues have increased by $964,000. Some 7 natural level of growth (due to new customers) and shrinkage per customer (based on 10 8 industry claims related to more efficient appliances) is expected. But, the results of the 9 OCA analysis are not readily explained by these expected events. 11 To put this issue in context, the following summary is taken from the information 12 provided on SourceGas Exhibit 1, Schedule 10: 13 14 Table 6: Pro Forma Revenue Comparison 15 Pro Forma Pro Forma Pro Forma General Rate Case 201 1 Ended Results ExhibitG June 30, 2012 Small General Service $27,189,860 $27,212,922 $27,234,678 Medium General Service $4,721,243 $5,212,045 $5,206,562 Large General Service $3,178,901 $4,011,004 $3,910,664 Transportation $632,101 $463,071 $423,036 Revenue Credits $890,521 $1,018,151 $939,547 Other Revenue $770,667 $705,240 $645,995 16 TOTAL $37,383,292 $38,622,423 $38,360,480 17 Nothing on Table 6 looks particularly odd enough to warrant suspicion of an error, as the 18 changes from year-to-year are relatively small and the changes are consistent with 19 customer count changes reflected elsewhere in the case. However, the OCA continued to 20 be curious about the growth in revenues and whether it was likely to continue to grow at 21 the same pace as shown on Table 6. So, we started to look at monthly data and the 22 underlying normalized sales volumes. This data is shown on the graph below: 23 24 Direct Testimony of Denise Kay Parrish 11 Docket No. 30022-192-GI-12

1 Graph 1: Total Weather Normalized Therms Excluding Transport Customers 2 25,000,000 Total Weather Normalized Therms Excluding Transportation January 2010 - June 2012 20,000,000 0 0 a) -4 a) (1-4 Lb -4 15,000,000 10,000,000 5,000,000 0 I. I 3 4 5 6 7 8 9 10 11 12 Since the data on this chart is supposed to be weather normalized rather than actual, examination of the monthly data as depicted on the above graph caused several questions to arise. Our primary question is why the normalized therms for a single month in different years are not more similar. For instance, the normalized therms for January are 19.6 million for 2010, 20 million for 2011 and 17.6 million for 2012. This is a significant range for therms data that is supposed to be adjusted to represent a normal weather year. How can the normal weather year be so different within a three year time frame? Similarly, the normalized therms for April are 11.2 million, 12.1 million, and 10.7 Direct Testimony of Denise Kay Parrish 12 Docket No. 30022-192-G1-12

1 million for 2010, 2011, and 2012 respectively. This again is quite a range for a three year 2 period. 3 4 The decreasing weather normalized therm figures are also strange when coupled with 5 growth in the customer base. The data is showing that there has been noticeable growth in 6 the number of customers, even if customer counts are still cyclical. The overall customer 7 growth is shown in the chart below. 8 9 Graph 2: Total Number of Premises Billed Each Month Excluding Transport Customers 10 Total Number of Premises Billed Excluding Transportation January20l0-iune 2012 79,000 77,000 75,000 73,000 71,000 69,000 67,000 11 12 65,000 13 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-01-12

1 It is very unclear as to how a stable level of normalized customer usage multiplied by a 2 growing customer base could result in a reduced total number of normalized therms. I 3 have made a high level review of the weather normalization adjustment spreadsheets and 4 have discussed my concern with Mr. Hammer. Neither activity has resulted in a 5 satisfactory answer to the OCA s concern about whether the total SourceGas presented 6 normalized therms are correct as presented in its testimony. 7 8 Q. WHY IS IT IMPORTANT TO THE EARNINGS REVIEW TO HAVE A PROPER 9 LEVEL OF WEATHER NORMALIZED THERMS? 10 A. It is important because the therms form the basis for the pro forma normalized revenues 11 in the proceeding. The calculation of the revenues for Small General Service customers 12 based on current rates for the 12 months ended June 30, 2012 is shown on SourceGas 13 Schedule Exhibit 5, JSH-3, Schedule 6, page 2 of 5. In looking at this schedule, one may 14 see that the billed volumes plus the adjustment to volumes for the weather normalization 15 are summed to arrive at normalized volumes in therms. This sum is then multiplied by 16 the current rate (with the rate disaggregated into various categories) to arrive at the total 17 normalized revenue for the month for that one category. The total revenue is arrived at 18 by summing the normalized revenues for the various rate categories for each of the 19 months. Thus, it is important to make sure that the volumes are correct, since they have 20 an important role in the overall revenue computation. 21 22 Q. BASED ON WHAT INFORMATION YOU HAVE REVIEWED TO DATE, ARE 23 THE NORMALIZED VOLUMES MORE LIKELY TO BE UNDERSTATED OR 24 OVERSTATED IN THE SOURCEGAS SCHEDULES? 25 A. Based on my review thus far, it appears that the normalized volumes may be understated. 26 This is based on another look at the monthly volumes and customer counts that are shown 27 on Graphs 1 and 2 above. An additional summary of that data is provided on the 28 summary table below. 29 30 31 32 14 Direct Testimony of Denise Kay Parrish Docket No. 30022-1 92-GI- 12

1 Table 7: Bill Count and Annual Weather Normalized Usage Comparison 2 Pro Forma Pro Forma Pro Forma General Rate 201 1 Ended Case Exhibit G June 30, 2012 Resu Its Small General Service Total Premises Billed 892,461 902,107 908,525 Weather Normalized Therms 67,041,303 69,681,367 67,650,403 Medium General Service Total Premises Billed 23,145 24,116 24,205 Weather Normalized Therms 22,316,698 20,548,382 20,296,886 Large General Service Total Premises Billed 3,246 3,222 3,193 Weather Normalized Therms 17,616,503 19,773,420 19,058,198 Total (Excluding Transport) Total Premises Billed 918,852 929,445 935,923 Weather Normalized Therms 103,310,399 110,003,169 107,005,487 3 4 The data shows that there were a total of 892,461 premises billed for small general 5 6 7 8 9 10 11 12 13 14 15 16 service during the rate case test year with 67,041,303 weather normalized therms. equates to about 75 therms per bill. If the same computation is done for the 2011 and 12 months ended June 30, 2012 time frames, the results are 77 therms and 74 therms respectively. For the medium general service class, the rate case test year average annual usage was 964 therms. Based on the information on shown on Table 7, the 2011 and current period usage are 852 and 839 therms, respectively. For the large general service class, the rate case test year average annual usage was 5,427 therms. This The same information for the 2011 time frame was 6,137 therms while the current period amount is 5,968. 17 18 19 20 21 The pattern looks odd but it is not currently clear whether this pattern is correct. It is also not clear whether the current period data is more correct than the rate case data, or vice versa, if a problem does exist. For example, some have opined that the current period data is likely to be more correct, given all the billing problems and the recreation of data 15 Direct Testimony of Denise Kay Parrish Docket No. 30022-1 92-GI- 12

4 Finally, if the problem is with the rate case data and not the current period usage 3 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-01-12 16 31 DUPCA. 30 that same erroneously high data would be used to compute credits to customers in the 27 The reason that this rate mechanism might mute the impact of any error in the weather 28 normalized volumes in this case is that those same volumes would be part of the DUPCA 29 calculation. Thus, if erroneously high data was reflected as current period usage data, 20 classes) and compares that average usage to the per customer weather normalized use per 24 collected revenues is then spread over the current period volumes to derive a volumetric 26 14 computation as one would think. This muting of the revenue impact of any additional 23 portion of the rate applicable to the customer class. This computed shortfall or excess in 25 based bill surcharge or bill credit. 22 number of customers in the class and that product is further multiplied by the distribution 13 volumes, the impact may be muted and not have as much impact on the earnings 12 A. Yes. Even if there are corrections or changes that need to be made to the normalization 17 18 The DUPCA takes the difference between the current average weather normalized usage 19 per customer (separately for the small general service and medium general service 21 customer from the test year of the last rate case. The difference is multiplied by the 11 HAVE BEEN PRESENTED? 10 APPROPRIATENESS OF THE WEATHER NORMALIZED VOLUMES THAT 16 Customer Adjustment (DUPCA). 9 Q. IS THERE ANOTHER FACTOR TO CONSIDER WHEN EXAMINING THE 15 normalization changes may occur because of the effect of the Distribution Use per 6 It may be a circumstance where there is an acceptance of the current data without 7 additional information being available. 5 information, further reconciliation and explanation of the usage pattern may be difficult. 8 2 is more likely to be representative of on-going operations than is the prior rate case data. 1 that had to be done at the time of the rate case. If this is true, then the current usage data

4 Commission may make as an informed a decision as possible. However, the Commission 3 A. It was important to me to raise the relative uncertainties that may exist so that the 25 A. I find nothing about Mr. Binswanger s discussion of past underearnings to be relevant to 27 this proceeding looking forward with the focus on the reasonableness of the existing rates 28 on a going forward basis. The Commission is not in a position to go back and make up 29 for past losses, as it is prohibited from retroactive ratemaking. If at any point in time, 30 SourceGas believes it is or will be underearning in the immediate future, it has the option 22 Q. HOW DO YOU RESPOND TO THE DISCUSSION IN MR. BINSWANGER S 26 the subject of this investigatory proceeding. The Commission should spend its efforts in 24 ON A CUMMULATIVE BASIS SINCE MARCH 30, 2007? 23 TESTIMONY ABOUT SOURCEGAS HISTORICAL ACCUMULATED LOSSES 20 change that decision if information provided so justifies. 14 warranted a reduction in rates on a going forward basis, it could make a point of then 7 SourceGas the opportunity to provide any additional information that it has. But, the lack 2 REVENUES AND THE EARNINGS REVIEW? 1 Q. WHERE DOES ALL OF THIS UNCERTAINTY LEAVE US RELATIVE TO 5 must not become paralyzed relative to the decisions that it must make in this proceeding. 6 Raising questions and uncertainties relative to the revenue figures now provides 8 of perfect information is no different than most situations that the Commission finds itself 9 in where it must make a decision based on the best information that it has available. 10 11 The Commission may also wish to address some of the information that may be 12 unexplained or concerning in this case through some on-going monitoring and reporting. 13 For example, if the Commission found that the facts of this investigatory review 15 monitoring the revenues and sales data to make sure that further action was not required. 16 17 Or, the Commission could focus its attention on the monitoring process that already 18 exists through the filing of the annual report and the Rule 249 required reporting. It 19 would make its decision on the best information it has in this case knowing that it can 21 31 of filing a rate case to address that earnings situation. It is not a responsible management 17 Direct Testimony of Denise Kay Parrish Docket No. 30022-1 92-GI- 12

1 practice to let losses accumulate and then try to go back and collect those losses for past 2 periods. 3 4 Additionally, SourceGas had a general rate case during the five year period discussed by 5 Mr. Binswanger. It did raise its rates and it is those rates that are in question in this 6 proceeding. Going back and looking at rates no longer in effect and have since been 7 found to be no longer just and reasonable would be futile. Based on the table found on 8 page 11 of Mr. Binswanger s testimony, the alleged underearnings occurred prior to the 9 change in rates that occurred as a result of the 2010 general rate case. In 2011, according 10 to Mr. Binswanger s table, earnings exceeded those anticipated as a result of the rate case 11 by more than one-half of a million dollars. So again, looking forward, the underearnings 12 problem described by Mr. Binswanger has been corrected and is no longer an issue that 13 should be considered in this proceeding. 14 15 Q. MS. PARRISH, WHAT DECISION SHOULD THE COMMISSION MAKE 16 REGARDING SOURCEGAS EARNINGS AS A RESULT OF THE 17 INFORMATION YOU HAVE PROVIDED? 18 A. Thus far, my testimony shows that revenues are generally increasing through customer 19 growth that appears to be outpacing declining usage, bad debt costs have decreased, and 20 customer accounting and information costs have decreased on a permanent basis. The 21 revenues are up nearly a million dollars and expenses are down nearly a million. But, the 22 numbers show many other changes from the specific expenses used to derive the rates in 23 the most recent rate case. Storage and transmission expenses have decreased slightly 24 while distribution costs have increased slightly. Payroll costs continue to increase due to 25 pay raises in the normal course of business. Depreciation expense continues to increase 26 as new plant is added. Insurance costs are reviewed and costs are tightened up and 27 reduced. There is a normal ebb and flow of cost increases and decreases. But, in general, 28 the trends in this case show that any short term earnings in excess of the authorized return 29 are diminishing quickly and will likely be gone in the very near future. 30 18 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-01-12

1 For example, SourceGas indicated that it would be adding new plant investment of nearly 2 $1 million in 2012 for a Lusk lateral. At its current rate of return, the revenue 3 requirement impact on a $1 million investment would be $1 million multiplied by 7.98% 4 times the gross tax multiplier resulting in a revenue requirement impact of $122,769 5 excluding additional depreciation expense and operation and maintenance costs. It does 6 not take many investments of that magnitude or common rate case expenses for the 7 discussion to flip from a rate decrease to a rate increase. 8 9 To provide another example, the increase in labor, payroll tax and benefits in 2011 for 10 normal wage increases was about $23 8,130. If rates were to incorporate another year of 11 labor increases of this size, it too would eat away at any excess earnings currently being 12 shown in the SourceGas financial reports. 13 14 Regulatory lag is generally not helpful in cases where earnings exceed authorized returns. 15 Most costs tend to increase rather than decrease over time, making short term excessive 16 earnings disappear quickly. That is exactly what is happening in this case. Cost 17 increases and new investments are eating away at the short-term excessive earnings that 18 appeared based on normalized expense and revenue numbers. If the Commission took 19 the time to do a more traditional soup-to-nuts review of each cost and revenue in the case, 20 I fully expect that any remaining overearnings would be gone by the end of such a 21 review. It is for that reason, that the OCA is not recommending that SourceGas be 22 ordered to file a rate case in the immediate near term. While there are no guarantees, 23 there is a strong likelihood that the filing of a rate case would result in a rate increase 24 rather than a rate decrease. 25 26 Rather than directing the filing of a rate case, the Commission should look to the 27 testimony of Mr. Lewis Binswanger on page 14 of his testimony where he discusses the 28 concept of applying a negative surcharge for a 12 month period. Temporary reductions 29 in rates or the application of negative surcharges have been utilized by the Commission in For additional detail see lines 9 and 10 on SourceGas Exhibit 5, JSH-2, Schedule 3A or Exhibit 5, JSH-2, Schedule 3D, page 1 of 1. 19 Direct Testimony of Denise Kay Parrish Docket No. 30022-192.01-12

4 Q. WHY HAVE YOU NOT DISCUSSED POTENTIAL CHANGES IN THE RATE 3 23 A sister company of SourceGas 20 9.2 % to about 9.6% with the lower return applying to a utility with a substantially 22 6 CURRENT EARNINGS REVIEW? 7 A. There are two reasons that the discussion of changing rates of return may be not be a key 1 similar circumstances in the past to address temporary overearnings situations. This 2 concept makes sense as a means of addressing the earnings situation in this case. 5 OF RETURN ON RATE BASE AS PART OF YOUR ANALYSIS OF THE 8 element of the Commission s decision on this matter. First, the Commission s rules 9 specifically benchmark the earnings review done annually for those companies with 10 regulated commodity balancing accounts to the last authorized rate of return on rate base. 11 The benchmark is not to compare current earned returns against current comparable 12 market returns or current returns with similar risk. Instead the benchmark is against the 13 return on rate base last authorized. 14 15 Second, SourceGas currently authorized returns on rate base and equity are not 16 particularly old or out of date given that SourceGas most recent rate case decision was 17 issued less than 20 months ago. SourceGas currently is authorized a return on rate base 18 of 7.98% based on a return on equity of 9.92%. The most recent authorized returns on 19 equity for natural gas companies authorized by the Commission have ranged from about 21 different risk profile. 31 might land were it to be updated from its current level. 24 reveiew by the Arkansas Public Service Commission. The Order approving the settlement 26 agreement of a return on equity of 9.45% resulting in an overall rate of return of 6.21%. 27 While this rate agreement was for SourceGas Arkansas rather than SourceGas 29 analysis for both companies would be based on the same investment ratings and market 30 beta. The Arkansas agreement provides another data point as to where SourceGas return 28 Distribution, both companies have the same set of corporate owners and thus, the return 25 in that case (Docket No. 12-003-U, Order No. 7 dated May 23, 2012) approved an SourceGas Arkansas recently Direct Testimony of Denise Kay Parrish Docket No. 30022-192-GI-12 20 underwent an earnings

1 2 Q. HAVE YOU CALCULATED THE IMPACT ON SOUCEGAS REVENUE 3 REQUIREMENT IF THE RETURN ON RATE BASE WERE TO BE 4 AUTHORIZED AT A DIFFERENT LEVEL? 5 A. Yes, for informational purposes, I have computed the impact on the revenue requirement, 6 assuming the same capital structure utilized in the most recent general rate case but with 7 an updated cost of debt: 8 9 Table 8: illustrative Updated Weighted Average Cost of Capital 10 11 12 Percent of Cost or Weighted Capital Structure Allowed Average Cost Return Long Term Debt 49.66% 5.596% 2.78% Equity 50.34% 9.45% 4.76% TOTAL 7.54% 13 Table 9: Impact on Revenue Requirement due to Updated illustrative Rate of Return on Rate Base 14 1 2-Months Ended 12-Months Ended June 30, 2012 June 30, 2012 Using Illustrative Using Currently Updated Weighted Authorized Return Average Return Rate Base $107,688,991 $107,688,991 Return 7.98% 7.54% Required Return $8,589,070 $8,119,749 Adjusted Earned Income $8,733,317 $8,733,317 Excess Income ($144,247) ($613,568) Gross Tax Multiplier 1.5384 1.5384 Excess Revenue ($221,918) ($943,913) 15 16 As Table 9 shows, if the weighted average return on rate base were to be changed from 17 its currently authorized level of 7.98% to 7.54%, the earnings in excess of the authorized 18 return would change from about $222,000 to about $944,000. However, I stress that the 19 OCA has done no analysis that the illustrative return on rate base of 7.54% provides an Direct Testimony of Denise Kay Parrish 21 Docket No. 30022-192-GI-12

1 adequate return to SourceGas or that it meets the principles of rate of return development 2 as spelled out in the Hope and Bluefield cases. 3 4 Q. IN AN EARLIER RESPONSE, YOU SUPPORTED SOURCEGAS CONCEPT OF 5 A TEMPORARY BILL CREDIT. ARE YOU RECOMMENDING A SPECIFIC 6 BILL CREDIT LEVEL? 7 A. Yes, although with some trepidation. My testimony contains discomfort with the pro 8 forma revenue levels and does not contain a fully updated cost of capital analysis. It also 9 is based on a very high level review of SourceGas s submitted figures. My 10 recommendation is based on the best information available to me, knowing that the 11 information is less than complete. 12 13 As a compromise that would recognize some of these unknowns and unanswered 14 questions, it would be reasonable to authorize a temporary bill credit that reduced non- 15 commodity revenues by an amount in the range of $500,000 to $750,000. 16 17 If the credit were to be an amount of $500,000 of annual revenues, this could be returned 18 through a volumetric bill credit of $0.00467 per therm. This volumetric level was 19 computed by dividing $500,000 by normalized sales volumes for the 12 months ended 20 June 30, 2012 of 107,005,487. Alternatively, if a temporary rate reduction of $500,000 21 were to be divided equally among all customers except transportation customers, the 22 fixed monthly bill credit would equal about $0.53 per month. 23 24 Based on similar calculations, a volumetric based temporary rate reduction of $750,000 25 would involve a per therm credit of $0.007. The fixed rate credit to reduce annual rates 26 by about $750,000, spread across all except transportation customers, would require a bill 27 credit of about $0.80 per month. 28 29 Additionally, the OCA recommends a slight change in financial reporting for SourceGas. 30 Historically, the annual financial earnings comparison has been included by SourceGas in 31 its pass-on application filed in August of each year. I recommend that beginning in 2013, 22 Direct Testimony of Denise Kay Parrish Docket No. 30022-192-61-12

1 SourceGas file this mandated financial information with its late-april (no later than May 2 1st) pass-on application. Moving the filing of this financial information to earlier in the 3 calendar year has several advantages. First, it will allow the Commission to determine 4 whether there is any continuing excess earnings situation even after the resolution of the 5 current earnings review and it will allow this determination to be made early in the 6 year. Second, it will allow the filing of the pass-on financials to be better coordinated 7 with the annual report filing, putting the pass-on financial filing on a calendar year basis. 8 9 Q. IS THERE ANY PRECEDENT FOR A TEMPORARY BILL REDUCTION OR 10 SIMILAR ACTION TO ADDRESS OVEREARNINGS THAT WERE IDENTIFED 11 AS PART OF A COMMODITY BALANCING ACCOUNT OR PASS-ON CASE? 12 A. Yes. On November 3, 2003, the Commission issued an Order Approving Stipulation 13 involving a stipulation between the Office of Consumer Advocate and Montana Dakota 14 Utilities Co. (MDU). This matter involved three different dockets (Docket No. 30013-15 GI-03-141, Docket No. 30013-GP-03-139, and Docket No. 30013-GP-03-138): two pass- 16 ons and a show cause to determine whether MDU was exceeding its authorized rate of 17 return and whether its retail rates should be reduced. 18 19 In these MDU cases, the Commission denied two monthly PGA filings based on 20 showings that MDU s pro forma earnings were in excess of its authorized rate of return. 21 More specifically, agreement was reached that the dollar value of these two PGA filings, 22 totaling $132,170, would not be allowed to be collected from ratepayers in the future 23 through the PGA or otherwise, making the rate I revenue reduction permanent. Not 24 allowing customers bills to increase has the same impact on customers as allowing the 25 PGA rate increases to take effect and then otherwise reducing other aspects of a 26 customer s bill. In either case, MDU s allowable revenues were reduced by the amount 27 of the identified excess earnings. But, this was done on a one time basis, with the order 28 noting at paragraph 10, 29 30 31 Direct Testimony of Denise Kay Parrish 23 Docket No. 30022-192-GI-12

1 2 At the hearing, it was clarified that paragraph 21 of the Stipulation, in 3 calling for an annual reduction of revenues of $132,170.00 and the 4 provision of Stipulation paragraph 24 that the reduction of revenues of 5 the Company shall be on a one-time basis and shall not reduce revenues 6 for the upcoming year mean that the $132,170 will constitute a single 7 reduction in revenues of this amount and that it should not be given an 8 ongoing effect similar to that which would occur if MDU s base rates 9 were to be reduced by this amount. 10 11 While the means of effectuating the one-time rate reduction recommended by OCA in 12 this proceeding is different than the means used to reduce revenues in the MDU cases 13 cited above, both involve one-time revenue decreases to address overearnings situations. 14 15 Q. DOES THAT CONCLUDE YOUR PREFILED DIRECT TESTIMONY IN THIS 16 PROCEEDING? 17 A. Yes, itdoes. Direct Testimony of Denise Kay Parrish 24 Docket No. 30022-192-G1-12

BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING IN THE MATTER OF THE COMMISSION INVESTIGATION UPON ITS OWN MOTION TO DETERMINE WHETHER SOURCEGAS DISTRIBUTION, LLC IS EXCEEDING ITS Docket No. 30022-192-GI-12 AUTHORIZED RATE OF RETURN, SUCH ) Record No. 13200 THAT ITS RATES ARE NOT JUST AN]) REASONABLE, AND ORDER TO SHOW CAUSE WHY ITS RETAIL RATES SHOULD NOT BE REDUCED ) ) ) ) ) ) ) ) AFFIDAVIT, OATH AND VERIFICATION Denise Kay Parrish (Affiant) being of lawful age and being first duly sworn, hereby deposes and says that: Affiant is the Deputy Administrator of the Wyoming Office of Consumer Advocate which is a party intervener in this matter pursuant to its Notice of Intervention filed on August 17, 2012. Affiant prepared and caused to be filed the foregoing testimony. Affiant has, by all necessary action, been duly authorized to file this testimony and make this Oath and Verification. Affiant hereby verifies that, based on Affiant s knowledge, all statements and information contained within the testimony and all of its attached schedules are true and complete and constitute the recommendations of the Affiant in her official capacity as Deputy Administrator of the Wyoming Office of Consumer Advocate. Further Affiant Sayeth Not. Dated this 17 th of September, 2012. STATE OF WYOMNG) ) SS: COUNTY OF LARAMIE ), enise Kay Parris miiistrator Wyoming Office of Consuner Advocate 2515 Warren Avenue, Suite 304 Cheyenne, WY 82002 (307) 777-5743 The foregoing was acknowledged before me by Denise Kay Parrish on this i7 day of September, 2012. Witness my hand and official seal. My Commission Expires:&U L / Direct Testimony of Denise Kay Parrish 1 Docket No. 30022-192-GI-l2