BEFORE THE ARKANSAS PUBLIC SERVICE … · 5 Arkansas, 1 University of Arkansas, Fayetteville, AR 72701-1208. My email 6 address is ... his surrebuttal addresses ... 11 William Weekley

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BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

IN THE MATTER OF THE APPLICATION OF SOURCEGAS ARKANSAS INC., FOR APPROVAL OF A GENERAL CHANGE IN RATES AND TARIFFS

) ) ) )

DOCKET NO. 13-079-U

PREFILED SURREBUTTAL TESTIMONY

OF

LAWRENCE “SCOTT” TURLEY

ON BEHALF OF THE

UNIVERSITY OF ARKANSAS

APSC FILED Time: 4/4/2014 11:11:21 AM: Recvd 4/4/2014 11:07:59 AM: Docket 13-079-U-Doc. 142

Surrebuttal Testimony of Lawrence “Scott” Turley On behalf of the University of Arkansas APSC 13-079-U

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I. INTRODUCTION .................................................................................................. 3

II. PURPOSE ............................................................................................................ 3

III. INTRODUCTION OF UA SURREBUTTAL TESTIMONY .......... .......................... 4

I. EXTENSION OF FACILITIES ........................... ................................................... 6

II. BILLING DETERMINANTS .............................. .................................................... 8

III. RETURN ON EQUITY ........................................................................................ 11

IV. SUMMARY OF UA’S RECOMMENDATIONS ................... ................................ 13



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I. INTRODUCTION 1

Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS FOR THE 2

RECORD. 3

A. My name is Lawrence “Scott” Turley. My business address is The University of 4

Arkansas, 1 University of Arkansas, Fayetteville, AR 72701-1208. My email 5

address is [email protected]. 6

Q. DID YOU FILE DIRECT TESTIMONY IN THIS DOCKET ON FEBRUARY 14, 7

2014? 8

A. Yes. 9

Q. ON WHOSE BEHALF DO YOU TESTIFY? 10

A. I submit this Surrebuttal Testimony to the Arkansas Public Service Commission 11

(hereinafter “APSC” or the “Commission”) on behalf of the University of Arkansas 12

(hereinafter “UA”). 13

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II. PURPOSE 15

Q. PLEASE STATE THE PURPOSE OF YOUR SURREBUTTAL TES TIMONY. 16

A. My testimony introduces the other witnesses presenting surrebuttal testimony on 17

behalf of the UA, responds to the rebuttal testimony of Ms. Donna Campbell and 18

Dr. Michael J. Vilbert, and provides a summary of UA’s recommendations. 19

Q. PLEASE SUMMARIZE YOUR TESTIMONY. 20

A. The following summarizes my Surrebuttal Testimony: 21



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1) Extension of Facilities: The very purpose of a line extension policy and its 1

associated economic test is to allow for utility investments that encourage 2

economically viable load growth, which in turn will ultimately yield lower 3

rates for customers. In my opinion, a policy that allows utility investments 4

in facilities for new customer loads yet forbids utility investments for 5

modifications required by existing customers to increase their loads is 6

short sighted and not good public policy. 7

2) Billing Determinants: Given the timing and unique circumstances of this 8

rate case filing, the Commission should use discretion when choosing its 9

approach in determining billing determinants reflective of the particular 10

circumstances. 11

3) Return on Equity: The proposed Main Replacement Program (“MRP”) 12

Rider and At-Risk Meter Relocation Program (“ARMRP”) Rider should 13

affect the risk premium used in this case to determine SGA’s Return on 14

Equity (“ROE”). 15

III. INTRODUCTION OF UA SURREBUTTAL TESTIMONY 16

17 Q. ARE OTHER WITNESSES PROVIDING SURREBUTTAL TESTIM ONY ON 18

BEHALF OF THE UA IN THIS PROCEEDING? 19

A. Yes, the UA is also sponsoring the Surrebuttal Testimony of the witnesses listed 20

below: 21

1) Larry Blank, Consultant, TAHOEconomics, LLC. 22

2) Jessica Jeffries, Analyst, TME, Inc. (“TME”) 23



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3) Mark Garrett, Consultant, Garrett Group, LLC. 1

4) Ed Tinsley, P.E., Chairman of the Board, TME 2

Q. PLEASE SUMMARIZE THE SURREBUTTAL TESTIMONY OF LA RRY BLANK. 3

A. Dr. Larry Blank has adopted the direct testimony of UA witness Steven Ward. In 4

response to SGA’s rebuttal testimony, his surrebuttal addresses certain billing 5

determinant issues, rate design for the B-5 rate class, the proposed MRP rider, 6

the proposed ARMRP rider, and certain contested cost allocation issues. 7

Q. PLEASE SUMMARIZE THE SURREBUTTAL TESTIMONY OF JE SSICA 8

JEFFRIES. 9

A. Ms. Jeffries testimony responds to the rebuttal testimony of SGA’s witness, 10

William Weekley as it pertains to the MRP rider and the ARMRP rider. 11

Q. PLEASE SUMMARIZE THE SURREBUTTAL TESTIMONY OF MA RK 12

GARRETT. 13

A. Mr. Garrett’s testimony responds to the rebuttal testimony filed by SGA regarding 14

payroll, incentive compensation and depreciation expense. 15

Q. PLEASE SUMMARIZE THE SURREBUTTAL TESTIMONY OF ED TINSLEY. 16

A. Mr. Tinsley’s testimony responds to the rebuttal testimony of SGA’s witness Ms. 17

Donna Campbell and the direct testimony of APSC’s witness Robert Daniel 18

regarding SGA’s Extension of Facilities Rate Schedule No. 2.10. 19

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I. EXTENSION OF FACILITIES 1

Q. HAVE YOU REVIEWED THE REBUTTAL TESTIMONY OF MS. DONNA 2

CAMPBELL REGARDING RATE SCHEDULE 2.10 AS IT APPLIES TO THE 3

UA COMBINED HEATING THE POWER PROJECT? 4

A. Yes. Ms. Campbell interprets Rate Schedule 2.10 in a manner such that it would 5

not apply to the modification of SGA’s facilities to accommodate the requirements 6

of our new gas turbine generator. 7

Q. WHAT IS THE IMPACT OF HER INTERPRETATION OF RATE SCHEDULE 8

2.10 ON THE UA? 9

A. Her interpretation of Rate Schedule 2.10, if accepted by the Commission, 10

allocates 100% of the cost of gas distribution system modifications to the existing 11

customer, regardless of potential load growth impacts, on the belief that the 12

modifications are not considered installation of new piping to serve a new 13

customer. Applying this interpretation to our evaluation of natural gas service 14

options for the new gas turbine generator reduces the effective cost of the 15

pipeline bypass option (a portion of the cost of installing the pipeline is offset by 16

the avoided SGA line extension cost). This effectively increases the economic 17

viability of the pipeline bypass options as it compares to our SGA LDC standard 18

rate and special rate options. In short, Ms. Campbell’s interpretation pushes the 19

UA toward the pipeline bypass option. 20

Q. WHAT IS THE IMPACT OF MS. CAMPBELL’S INTERPRETAT ION OF RATE 21

SCHEDULE 2.10 ON THE OTHER SGA CUSTOMERS? 22



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As a fiscally responsible steward of taxpayer funds, the UA will select the natural 1

gas service option which offers the lowest life cycle cost. If the outcome of that 2

analysis is that the UA selects the pipeline bypass option, SGA will no longer 3

receive any revenues or contribution to fixed costs from the UA main campus. 4

SGA will not only lose the additional contribution to fixed costs associated with 5

the projected increase in UA natural gas volumes, it will also lose the existing 6

contribution to fixed costs associated with historical UA natural gas volumes. 7

Under standard ratemaking policy, the lost UA contribution to fixed costs will 8

ultimately be allocated to other SGA customers in the form of higher rates. 9

Consequently, the likely immediate impact of Campbell’s interpretation of Rate 10

Schedule 2.10 on other SGA customers is higher rates. 11

Since marginally higher rates will ultimately cause other customers to both 12

consider and implement alternative supply arrangements, special rate contracts, 13

electric or other fuel source heating systems, relocation of industrial facilities, and 14

reduced customer growth, the long term impact on the remaining SGA customers 15

would be even higher rates. 16

Q. IS A NARROW INTERPRETATION OF RATE SCHEDULE 2.10 17

APPLICABILITY GOOD PUBLIC POLICY? 18

A. As stated previously, the very purpose of a line extension policy is to allow the 19

utility to make economically viable investments that increase load growth, which 20

in turn will ultimately yield lower rates for all customers. Utility investments in 21

modifications required to accommodate higher gas volumes from an existing 22

customer offer the same, if not greater potential benefit, to other ratepayers as 23



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investments in line extensions to new customers. In either case, the general rate 1

payer is protected by the requirement of economic viability of the investment. In 2

my opinion, a policy that allows utility investments in facilities for new customers 3

yet forbids prudent utility investments for modifications required by existing 4

customers does not serve the rate base as a whole and thus is not good public 5

policy. 6

Q. IS THIS ISSUE ADDRESSED BY ANOTHER UA WITNESS? 7

A. Yes. The Surrebuttal Testimony of UA Witness Ed Tinsley also addresses the 8

negative impact of Ms. Campbell’s interpretation of Rate Schedule 2.10 on the 9

UA and provides recommendations which would be a more just and reasonable 10

result. 11

12

II. BILLING DETERMINANTS 13

Q. HAVE YOU REVIEWED THE REBUTTAL TESTIMONY OF SGA’ S WITNESS 14

MS. DONNA CAMPBELL REGARDING BILLING DETERMINANTS? 15

A. Yes. In response to my concerns regarding SGA’s billing determinants, Campbell 16

referenced Arkansas Code Ann. §23-4-406. She states, expenditures and 17

volumes pertaining to the CHP Project will occur after September 2014. I agree 18

with her interpretation of the code that SGA cannot make any adjustments of 19

volumes past September 2014. 20

Q. PLEASE RESPOND TO CAMPBELL’S TESTIMONY REGARDING THE 21

SCHEDULE OF THE UA CHP PROJECT? 22



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A. Campbell States, “the expenditures to serve this increased load are not in this 1

filing nor are the volumes reflecting any usage that may occur with the CHP 2

Project. SGA cannot make any adjustments for a project occurring after 3

September 2014.”1 As stated in my direct testimony, the CHP project is 4

scheduled to be operational in May of 2015. The natural gas turbine generator is 5

scheduled to deliver in October 2014, with initial startup and testing in early Q2, 6

2015. This schedule requires construction of the high pressure gas supply 7

service for the turbine to begin early summer of 2014. 8

Q. WHEN MUST THE UA MAKE ITS DECISION ON HOW TO MOS T 9

ECONOMICALLY MEET THE SUPPLY REQUIREMENTS? 10

A. The UA must determine how to meet the volume and pressure requirements for 11

the CHP well before the volumes are supplied to the gas turbine. In fact the 12

construction of the high pressure gas supply service must be complete prior to 13

startup of the gas turbine in order to maintain the schedule and to optimize 14

economics of the CHP project. 15

Q. DOES ARKANSAS CODE ANN. §23-4-406 ALLOW PRO FORM A 16

ADJUSTMENTS? 17

A. Yes. The referenced code states: 18

However, the commission shall also permit adjustments to any test year so 19 utilized to reflect the effects on an annualized basis of any and all changes 20 in circumstances which may occur within twelve (12) months after the end 21 of the test year where such changes are both reasonably known and 22 measurable.2 23

1 Campbell, Rebuttal at 22. 2 A.C.A. §23-4-406



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SGA suggests that the only known and reasonable adjustment is a plant closure. 1

However, other adjustments meet the test of being both reasonably known and 2

measurable, and therefore should be included in the pro forma year. 3

Q. WHAT ARE THESE OTHER ADJUSTMENTS THAT SHOULD BE INCLUDED 4

IN THE PRO FORMA YEAR? 5

A. There are two factors that UA recommends to be included as adjustments in the 6

pro forma year. The first pro forma adjustment as it relates to B-5 rate class 7

should be to include load growth. In general, there should be an adjustment for 8

the effect of a projected increase in Arkansas’s gross state product for the pro 9

forma year and the positive impact that it is likely to have on the existing B-5 10

industrial customers’ natural gas consumption. 11

In addition to general economic growth factors, load growth projections 12

should include the additional load of the CHP. UA agrees the actual numerical 13

gas volumes associated with the CHP, unfortunately, cannot be included in the 14

pro forma year ending September 2014 per state statute. However, the load 15

growth projection used in the pro forma, can and should be adjusted to include 16

the load growth impact of the CHP because it is known and measureable. 17

Q. WHAT IS THE OTHER ADJUSTMENT THAT SHOULD BE INCL UDED IN THE 18

PRO FORMA YEAR? 19

A. The effects of the weather sensitivity of the B-5 rate class should also be 20

included in the pro forma year. It is true that the B-5 class is not nearly as 21

weather sensitive as other classes when compared on a percentage of base load 22

basis. However, when compared on a volume basis, the B-5 class has nearly 23



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identical weather sensitivity to the B-2 class and is comparable to the B-1 class. 1

Although the base load percentage is a useful index, it is the volume of gas 2

needed by customers on the system under heating conditions that is the 3

fundamental issue. 4

UA witness Blank speaks further to both of these issues in his testimony. 5

6

Q. WHAT IS YOUR RECOMMENDATION CONCERNING THE PRO FORMA 7

BILLING DETERMINANTS? 8

A. The Commission has broad discretion in choosing an approach to rate regulation 9

and is free, within its statutory authority, to make any reasonable adjustments 10

which may be called for under particular circumstances. General Telephone Co. 11

v. Arkansas Public Service Commission, 272 Ark. 440, 616 S.W.2d 1 (1981) 12

Southwestern Bell Telephone Co. v. Arkansas Public Service Commission, 18 13

Ark. App.260, 715 S.W.2d 45 (1986). 14

Given the timing and unique circumstances of this rate case filing, I 15

recommend the Commission include to the extent possible, all adjustments that 16

may occur during the pro forma year, including weather adjustments to the B-5 17

rate class, and adjusted growth projections based on known load growth as well 18

as the load reductions proposed by SGA. 19

III. RETURN ON EQUITY 20

Q. HAVE YOU REVIEWED THE REBUTTAL TESTIMONY OF SGA’ S WITNESS 21

DR. MICHAEL J. VILBERT REGARDING RETURN ON EQUITY ( “ROE”)? 22



12

A. Yes, Dr. Vilbert commented that my recommendation “[t]o consider the 1

performance of the Company when setting the allowed ROE can be a useful 2

regulatory tool, but such a policy must be implemented in a way that provides 3

rewards as well as penalties.” 4

Q. DO YOU AGREE WITH DR. VILBERT’S COMMENT? 5

A. Yes. 6

Q. ARE THERE ADDITIONAL FACTORS YOU WOULD RECOMMEND THE 7

COMMISSION CONSIDER WHEN ESTABLISHING ROE? 8

A. Yes. The Commission should consider the proposed MRP rider and ARMRP 9

rider in establishing SGA’s return on equity. 10

Q. WHY SHOULD THE APPROVAL OF THE PROPOSED RIDERS E FFECT THE 11

ESTABLISHMENT OF ROE? 12

A. When establishing ROE, the Commission should consider SGA’s proposed riders 13

MRP and ARMRP because cost recovery riders, also known as “trackers”, 14

reduce business risk. As stated by Ken Costello, Principal of The National 15

Regulatory Research Institute, at The NARUC Staff Subcommittee on Gas, and 16

NASUCA, “Because trackers reduce a utility’s business risk, a regulator might 17

want to consider revising downward the risk premium of a utility with additional 18

cost trackers, resulting in a lower return on equity.”3 19

3Ken Costello, Principal The National regulatory Research Institute, Talking Points on cost Trackers, The NARUC Staff Subcommittee on Gas, and NASUCA, Chicago, IL, November 15 and 17, 2009 http://www.narucmeetings.org/Presentations/Gas_Costello.pdf



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IV. SUMMARY OF UA’S RECOMMENDATIONS 1

Q. PLEASE SUMMARIZE UA’S RECOMMENDATIONS. 2

A. For the reasons provided herein, UA respectfully offer the following 3

recommendations for consideration by the Commission: 4

1) The Commission should use discretion when establishing the test year 5

billing determinates for the B-5 rate class. 6

2) The Commission should require SGA to apply weather normalization to 7

test year volumes for the B-3, B-4, and B-5 rate classes using the same 8

approach used for the Residential rate class. 9

3) The Commission should use load growth projections for the B-4 and B-5 10

rate classes. 11

4) The Commission should reject SGA’s MRP rider and ARMRP rider. 12

5) The Commission should consider SGA’s performance and the 13

Commission’s decision concerning SGA’s MRP and ARMRP Riders as 14

factors when establishing ROE. 15

6) The Commission should remove an adjustment in the amount of $33,494 16

to long term incentive costs from pro forma operating expenses. 17

7) The Commission should reduce the short term incentive level 18

recommended by Staff and the Company by $202,028. 19

8) The Commission should accept the Company’s February 3, 2014 20

annualized payroll costs, but disallow the cost attributable to future hires 21

and unfilled positions. 22



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9) Depreciation rates proposed by staff witness Ronald G. Garner should be 1

adopted by the Commission. 2

10) The Commission should require SGA to revise its load growth projections 3

to more accurately reflect anticipated load growth based on SGA’s capital 4

investment. 5

Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 6

A. Yes. 7


ATTESTATION

I do hereby swear and affirm that the foregoing is my Surrebuttal Testimony in Arkansas

Public Service Commission Docket No. 13-079-U and to the best of my knowledge, information

and belief, there are good grounds to support it and that it is not interposed for delay.

Scott Turley

Dated: 4·4- 20/4


CERTIFICATE OF SERVICE

I do hereby certify that I have caused to be served a copy of the foregoing Surrebuttal Testimony upon the following persons, via electronic mail, this 4th day of April, 2014

Mr. John Bethel Executive Director Arkansas Public Service Commission e-mail: [email protected]

Mr. Robert Booth Manager, Natural Gas and Water Utilities Section Arkansas Public Service Commission e-mail: [email protected]

N. M. Norton Counsel, Tyson Foods, Inc. Wright, Lindsey & Jennings e-mail: [email protected]

Matthew Greene Counsel, SourceGas Arkansas, Inc. SourceGas Arkansas, Inc email: [email protected]

M. Shawn McMurray Sr. Assistant Attorney General Attorney General of Arkansas email: [email protected]

Emon Mahony Assistant Attorney General Attorney General of Arkansas email: [email protected]

Elizabeth Thomas Smith


Documents

BEFORE THE ARKANSAS PUBLIC SERVICE … · 5 Arkansas, 1 University of Arkansas, Fayetteville, AR 72701-1208. My email 6 address is ... his surrebuttal addresses ... 11 William Weekley