DR 98-169 Northern Utilities, Inc. Petition for Step Increase for Bare Steel Replacement Order Approving Stipulation Regarding Step Increase O R D E R N O. 23,052 October 29, 1998 APPEARANCES: David A. Deans on behalf of Northern Utilities, Inc.; and Michelle A. Caraway and Stephen P. Frink for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On July 21, 1992 in Docket DR 91-081, the New Hampshire Public Utilities Commission (Commission) approved by Order No. 20,546 the Settlement Agreement proposed by the Commission Staff (Staff) and Northern Utilities, Inc. (Northern) for Northern's permanent rate case which had been filed on July 18, 1991. The Settlement Agreement included a provision for periodic step adjustments for certain defined investments and depreciations in a program for replacement of bare steel. Northern is replacing its unprotected bare steel mains with either cathodically protected mains or plastic mains (depending on the required pipeline pressure). This replacement program was implemented throughout the natural gas industry in order to minimize active corrosion and gas leaks. On September 18, 1998, pursuant to the Settlement Agreement and Order No. 20,546, Northern filed a petition for a step adjustment to base rates (Petition), to be effective with the November 1, 1998 billing cycle. The Petition seeks an adjustment to rates to recover the depreciation and return on certain investments related to its bare steel main replacement program. This is Northern's sixth annual step adjustment filing pursuant to Order No. 20,546. The requested increase in base rate revenues was $169,036. Northern, on September 28, 1998, prefiled testimony of its Manager of Revenue Requirements, David A. Deans. By Order of Notice (September 22, 1998) the Commission set a deadline for intervention by October 14, 1998. There were no intervention requests. The Office of Consumer Advocate is a statutorily authorized intervenor, though it did not participate in the docket. The Commission also scheduled a technical session to address the contents of the Petition and an audit performed by Staff and to explore the possibilities of settlement. Northern and Staff filed on October 16, 1998 a Stipulation on Proposed Step Adjustment (Stipulation). The Commission heard evidence in support of the Stipulation on October 20, 1998. II. POSITIONS OF NORTHERN AND STAFF Mr. Deans testified in support of the Stipulation, which proposes a revenue increase of $120,683. The primary reasons for the change from the originally proposed step adjustment amount related to the updating of originally forecasted activity for September 1998 with actual sales as well as adjustments agreed to during the Staff audit and the subsequent technical session and settlement discussions. Among the adjustments was the removal of amounts related to multiple bare steel service replacements on non-bare steel mains. Northern provided updated maps and exhibits describing the status of the bare steel program. The exhibits detail the footage and cost of the bare steel already replaced and remaining to be replaced. Edward Wencis, Engineering Manager, stated that corrosion leaks on the system related to bare steel had been higher than expected over the past two years, but that Northern was monitoring the situation. He also stated that replacement targets for the next three years were slightly higher than expected over the past two years. III. COMPONENTS OF THE SETTLEMENT AGREEMENT A. Main Replacement Investments and Rate of Return Northern's total step adjustment revenue requirement related to replacements is calculated on capital investments of $802,688 for the period October 1, 1997 through September 30, 1998. Incremental deferred income taxes related to these plant additions reduce the rate base amount subject to recovery in this step adjustment by $93,426, leaving a balance of $709,262. Using Northern's current capital structure and cost of debt results in a weighted cost of capital of 9.63% and a tax effected cost rate of 13.85%. Applying the tax effected cost rate (13.85%) to the balance available for recovery ($709,262) results in a revenue requirement of $98,233. B. Annualized Depreciation Expense The related annualized depreciation expense is calculated using the capital investment mentioned above ($802,688) and the applicable depreciation rates approved as part of the Settlement Agreement on permanent rates. The calculation results in an increase in annual depreciation of $22,450. IV. COMMISSION ANALYSIS We have reviewed the Stipulation and testimony in support thereof and find the stipulated revenue increase of $120,683 to be reasonable. The investments required to replace Northern's bare steel mains have been prudently incurred and are used and useful in the provision of utility service. In addition, this represents the next step in a program to improve safety and limit leakage, which the Commission has supported since its initiation in DR 91-081. Based upon the foregoing, it is hereby ORDERED, that the Stipulation between Northern and the Staff for an increase to base rate revenues of $120,683 per year, to recover depreciation and return on investments related to Northern's bare steel replacement program is APPROVED for bills rendered on or after November 1, 1998; and it is FURTHER ORDERED, that Northern file properly annotated tariff pages in compliance with this Order no later than 15 days from the issuance date of this Order, as required by N.H. Admin. Rules, PUC 1601.05 (k). By order of the Public Utilities Commission of New Hampshire this twenty-ninth day of October, 1998. Douglas L. Patch Susan S. Geiger Nancy Brockway Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary