KATZ, KANTOR & PERKING, PLLC ATTORNEYS AT LAW

FIFTH FLOOR LAW & COMMERCE BLDG. GUY W. PERKINS LEROY H. KAT2 (1017-1DD4) WAYNE L. EVANS WAYNE S. STONESTREET

307 FEDERAL STREET -

NORRIS KANTOR OF COUNSEL P.O. BOX 727

BLUEFIELD, WEST VIRGINIA 24701

COLIN M. CLINE ERIC J. BUCKNER

- TEL. 304d327-3551

TOLL FREE (800) Q37-3551

FACSIMILE NO. 304/325-7405

VIA HAND DELIVERY

July 27,2007

Sandra Squire, Executive Secretary Public Service Commission P.O. Box 812 Charleston, WV 25323

Re: Case Nos.: 07-0009-G-42T and 07-0201-GPC Bluefield Gas Company Rule 42T Application to increase gas rates and charges and Joint Petition

Dear Ms. Squire:

Enclosed please find an original and twelve (12) copies of “Initial Brief of Intervenor, City of Bluefield, West Virginia” in the above-referenced consolidated cases.

A copy has been served upon all parties of record.

Very truly yours,

Enclosures xc: Christopher L. Callas, Esquire

David A. Sade, Esquire John Auville, Esquire Thomas N. Hanna, Esquire David C. Smith, Esquire John Feuchtenberger, Esquire Mark Heme

KATZ. KANTOR & PERKINS. P.L.L.C. ATORNEYS AT LAW

l, > z: c-2 --. t $ 1 -p --..I f- :?I

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PUBLIC SERVICE COMMISSION 2 c.”. CHARLESTON -.A $j

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‘ , I c 3 a CASE NO.: 07-020 1 -GPC Bluefield Gas Company, a West Virginia Corporation md ANGD, LLC, a Virginia Company

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Joint Petition of Bluefield Gas Company and ANGD, LLC for Consent and Approval of the Purchase of the Common Shares of Bluefield Gas Company

and

CASE NO.: 07-0009-G-42T BLUEFIELD GAS COMPANY

Rule 42T Application to Increase Gas Rates and Charges

INITIAL BRIEF OF INTERVENOR, CITY OF BLUEFIELD, WEST VIRGINIA

NOW COMES the City of Bluefield West Virginia, a municipal corporation (“City of

Bluefield”, or “City”), Intervenor in the above styled consolidated cases now pending before

the Public Service Commission of West Virginia (PSC) and files its Initial Brief. As set forth

more filly below, the City of Bluefield is opposed to the Joint Petition for Consent and

Approval of the Purchase by ANGD, LLC of the Common Stock of Bluefield Gas Company

fiom RGC Resources, Inc. The City of Bluefield believes that the proposed sale is not in the

best interest of the customers of Bluefield Gas Company (BGC) and that the proposed stock

sale would adversely affect both the City of Bluefield as franchisor BGC and several thousand

customers of BGC who reside in the City of Bluefield.

I. Introduction

The issue before the Commission is whether, upon a review of the entire record, the

proposed sale of the common stock of Bluefield Gas Company by RGC Resources, Inc., to

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KATZ. KANTOR & PERKIMS. P.L.L.C. ATTORNEYS AT LAW

ANGD, LLC, would “adversely affect the public in this state” and more particularly whether

said proposed transaction would adversely affect the City of Bluefield and nearly 4,000

customers of Bluefield Gas who reside in the City of Bluefield. 8 24-2-12 of the Weest

Virginia Code. If the proposed sale is adverse to the interests of the City of Bluefield and to

current BGC customers such that RGC Resources, Inc., should be required to continue

operating BGC, a second issue arises, namely whether the increase of revenue of $323,853 as

recommended by Staff and CAD together with the associated rates and charges are just and

reasonable. It is the position of the City of Bluefield that the proposed revenue increase

should be limited to $176,242.

A. Procedural History

On January 4, 2007, BGC filed an application to increase its rates and charges for

providing natural gas service in Mercer County by approximately 4.6% annually. By

Commission Order entered January 22, 2007, the matter was referred for to the ALJ for

decision to be rendered on or before September 4, 2007. The Commission required a Staff

report by June 13,2007.

The matter was set for Hearing on June 26, 2007, and BGC was required to publish

notice of the hearing.

On February 20, 2007, BGC and ANGD, LLC, jointly petitioned the Commission for

consent and approval of the purchase of the cornmon stock of BGC by ANGD, LLC. On

April 23,2007, Staff moved to consolidate Case No.: 07-009-G-42T and 07-0201-G-PC. No

party objected to the

consolidated. A Public

consolidation

Hearing was

. By Order

scheduled for

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, I + - - < issued May 10, $007y~~the;cases were

June 26, 2007, and‘ Evident&ry $@ring I .

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KATZ. KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

was set for July 6, 2007, to address issues related both to the requested rate increase and the

stock transfer.

B. June 26,2007 Public Hearing

On June 26, 2007, a Public Hearing on the consolidated rate case and stock transfer

case was held in the Municipal Board Room at the Bluefield City Hall Complex. Numerous

persons testified at the hearing. Many had questions about the origin, ownership and

operation of ANGD, LLC. Almost all those who testified were concerned about the proposed

rate increase and about the ability of the many gas customers of BGC on fixed incomes to

afford the proposed increase, as well as any hture rate increases.

C. July 6,2007, Evidentiary Hearing

An Evidentiary Hearing in this matter was held in the Municipal Board Room located

at the Bluefield City Hall Complex on July 6, 2007. The Honorable Keith A. George,

Administrative Law Judge presided at the hearing. Testimony was offered by John B.

Williamson, 111, President and CEO of RGC Resources, Inc., Dale Lee, Vice President and

Corporate Secretary of BGC, J. David Anderson, Assistant Secretary and Assistant Treasurer,

BGC, John Ebert, CEO and Principal in ANGD, LLC, Randall Short, Utilities Financial

Analyst for the Consumer Advocate Division, Eric DeGruyter, Natural Gas Utilities Specialist

employed by the PSC, Thomas Sprinkle also of the PSC, Blaine Braithwaite, from the South

Bluefield Neighborhood Association, and Mark Henne, City Manager of Bluefield West

Virginia.

The Petitioners in Case No.: 07-0201-G-PC , Bluefield Gas Company and ANGD,

LLC, together with CAD and PSC Staff, through their respective counsel, offered as an

exhibit a Joint Stipulation and Agreement for Settlement (Revised). In said Joint Stipulation,

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KATZ. KANTOR & PERKINS. P.L.L.C. AlTORNEYS AT LAW

the Petitioners, CAD and Staff recommended approval of the stock sale and a revenue

increase of $176,242 subject to conditions set forth in the Joint Stipulation, and proposed that

the increase become effective as of the date of the closing of the transaction.

Judge George directed the parties to file Initial Briefs together with proposed findings

of fact and conclusions of law on or before Friday, July 27, 2007, with Reply Briefs to be

filed by August 3,2007.

11. Factual Background

ANGD, LLC, was formed in 2005, by John W. Ebert and William Clear. Effective

January 1 , 2006, ANGD, LLC, acquired Appalachian Natural Gas distribution company to

provide gas distribution service to approximately 300 customers in Russell, Buchanan and

Dickenson Counties in Virginia, with additional certificate/fianchise rights for Tazewell

County (except for the town of Bluefield). ANGD, LLC has 5 employees and utilizes

services of third parties to perform various functions such as distribution, construction, line

location, right of way maintenance, and other field support services. (Direct testimony of

John W. Ebert).

In February 2007, ANGD, LLC entered into a Purchase Sale Agreement with RGC

Resources, Inc., for the acquisition of the common stock in BGC, a wholly owned subsidiary

of RGC Resources, Inc. As part of said agreement, RGC Resources, Inc., will provide

support services to ANGD, LLC, for up to two (2) years after the sale. Although BGC’s

current office and local employees will be retained, accounting work, billing, collection

related work, call center and customer service will not be transitioned until three to four (3-4)

months after the proposed closing. More importantly, ANGD, LLC, will have no in-house

engineering services and will continue to rely on the Support Services Agreement for a

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KATZ. KANTOR & PERKINS. P.L.L.C. ATORNEYS AT LAW

considerably longer period of time in order to provide construction, design, bid preparation

and analysis, engineering support services, compliance reports, training, O&M, and OQ

Manuals (TR112). Currently, RGC Resources, Inc., furnishes engineering services for BGS

out of its Roanoke office.

The Joint Stipulation entered into between the Petitioners, CAD and Staff provides

that, in the event the proposed stock sale is approved, ANGD, LLC, may seek a rate increase

as early as 1 year form the closing of the transaction. In the event of an emergency (as

defined in the Joint Stipulation), a general rate increase may be applied for sooner. (See Joint

Stipulation, Paragraph 129.

RGC Resources, Inc., a publicly traded company, has thousands of customers, is well

capitalized and well established in the local gas distribution business. (Direct testimony of

John Williamson). ANGD, LLC, by contrast is a small, local distribution company without

the internal capitalization and company infrastructure necessary to begin its own independent

operation of BGC in the event that the stock sale is approved. BGC has lost money during

each of the past four (4) years, (TR84). Primarily, a diminishing customer rate base and

warmer then expected winters have been responsible for BGC’s operating deficits. (TR84-

86). Although in their testimony at the Evidentiary Hearing on July 6, 2007, officials from

ANGD and RGC Resources, Inc., purported to give assurances of a smooth transition if the

proposed stock sale is approved by the Commission, considerable doubt exists as to whether

ANGD, LLC, can operate BGC on a long term basis without major rate increases, particularly

after the Support Services Agreement expires, given the shrinking customer base for BGC and

the likelihood of continued warmer winters. Compared to RGC Resources, Inc., the current

owner of BGC, ANGD, LLC, is marginally capitalized. The proposed sale of the common

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.KATZ. KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

stock of BGC relies primarily on bank financing and debt subordination by RGC Resources,

Inc. (Direct testimony of John Williamson; Direct testimony John Ebert). The City of

Bluefield must have predictable and reliable gas service for its citizens on a continuing basis

and can not be the “guinea pig” in an experiment, such as the proposed sale, which will

transfer operation of BGC to a private concern less than two (2) years old serving 300

customers in a three (3) county LDC in southwest Virginia. (Direct testimony of Mark

Heme, TR188-192). The City of Bluefield is struggling financially. Many of its citizens,

including BGC customers, are on relatively low, fixed incomes. Much work remains to be

done to replace worn out pipe at a cost which has risen dramatically over the last several

years. Under all of these circumstances, the City believes that the considerable strength of

RGC Resources, Inc., and its ability to withstand economic setbacks, together with its proven

ability to operate BGC and provide stability in gas services would be a better choice to

operate the utility on a continuing basis as opposed to transferring operations to ANGD, LLC.

The City of Bluefield believes that Mr. Ebert and Mr. Clear are competent persons highly

skilled and knowledgeable in their fields. However, the fact remains that their company does

not have the demonstrated strength or ability to operate BGC over the next ten (10) years

given the shrinking customer base, relatively low income of BGC customers and the

likelihood of warmer winters, all of which would put considerable financial pressure on

whoever owns and operates the gas utility in Bluefield.

111. Argument

In order to approve the stock transfer and the proposed rate increase in this case, the

Commission must find that neither proposal will “adversely affect the public in this state”.

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KATZ. KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

0 24-2-12 West Virginia Code. The PSC of West Virginia was created for the purpose of

exercising regulatory authority over public utilities. Its function is to require such entities to

perform in a manner designed to safeguard the interests of the public and the utilities. Its

primary purpose is to serve the interests of the public. City ofSouth Charleston v. West

Virginia PSC and Green Valley Community Public Service Commission District 204 W.Va.

566, 514 S.E. 2d. 622 (1999). A utility may enter into a contract with another utility.

However, all contracts made by a utility are subject to review by the PSC. Id. Moreover,

contracts made by a utility relating to public service are entered into in contemplation of the

exercise by the State of its regulatory power when the public interest may make it necessary.

As part of its review of a utility contract, the PSC may modify or void any clause in the

contract that the Commission determines is adverse to the public interest. Id. &also Mill

Creek Coal and Coke Company v. Public Service Commission 84 W.Va. 662, 100 S.E. 557

(1919) Preston County Light and Power Company v. Renick 145 W.Va. 115, 113 S.E. 2d. 378

(1960).

It is the City’s position that the proposed stock sale is not in the interest of the City as

franchisor of the gas utility or BGC customers living in the City. As previously noted, the

City of Bluefield has great respect for Mr. Ebert and Mr. Clear, both of whom are competent

and knowledgeable individuals in their respective fields. However, the City’s financial

problems from which it is struggling to recover should not be compounded by subjecting the

City and the gas customers living therein to an experiment under which no real changes in the

operation of BGC are anticipated. With the likelihood of warmer winters and a continued

shrinking customer base for BGC, all of which exert downward pressure on revenues, it

makes no sense to transfer operations to a small private firm relatively new to the LDC

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.KATZ. KANTOR & PERKINS. P.L.L.C. ATORNEYS AT LAW

industry, particularly in light of the very small margin for error under which ANGD will be

forced to operate. The City of Bluefield requires stability as it continues its efforts to rebuild.

If the City’s population and industrial base was growing, and the number of gas

customers increasing, the City might better be able to gamble on the success of the proposed

stock transfer. However, at the present time under current conditions, the City believes that

RGC Resources, Inc., with its considerably larger financial structure and ability to operate

BGC should continue to own and operate BGC. The type of growth which ANGD seems to

foresee in order to increase its customer base through acquisition of smaller utilities is not

likely in the next several years and is not supported by evidence in the record. In other words,

it is very unlikely that ANGD, LLC will become another RGC Resources, Inc., in the next

five (5) or even ten (10) years. If further downturns in the local economy do occur, BGC

revenues will continue to decline and the need for a large, financially sound company to

operate BGC will be even more critical. The pipeline replacement program for BGC begun

by RGC Resources, Inc., is ongoing and is likely to become more expensive. Given the

differences in size, capital structure and ability between ANGD and RGC Resources, Inc., it is

more likely that the pipeline replacement and improvement of infrastructure will move toward

successful completion under the management under RGC Resources, Inc.

It is entirely unclear from the record when ANGD, LLC, will have in place competent

engineering personnel and other important services for BGC, all of which are now being

fbrnished by RGC Resources, Inc., through its Roanoke offices. The City of Bluefield and

gas customers who testified at the Public Hearing are concerned that ANGD, LLC, however

well intentioned it may be, will simply not be able to operate BGC after the Support Services

Agreement ends without additional large general rate increases. If economic conditions

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KATZ. KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

worsen considerably, the possibility exists that ANGD, LLC, may default on its debt forcing

the City or some other entity to take over operations of the gas utility.

The question then with respect to the stock transfer is one of continued stability and

whether, from the record, it can reasonably be said that if the stock transfer is approved,

ANGD, LLC, can and will provide that stability, not for the next two (2) years but for the next

ten (10) years and beyond. The City of Bluefield believes that the record does not support

ANGD’s ability to operate BGC over the next 5 to 10 years absent major growth in the city

and in the utilities customer base, both of which outcomes are not likely. The City believes

that RGC Resources, Inc.., at the present time and for the foreseeable future is better suited to

run BGC and that transfer of BGC to ANGD, LLC, would not serve the interests of the City

of Bluefield or BGC customers. Therefore, the City of Bluefield requests that the Petition

seeking transfer of the common stock of BGC to ANGD, LLC, be denied.

If the stock transfer is denied, the City of Bluefield requests that the revenue increase

as proposed in the Joint Stipulation and Agreement for Settlement be no more than

$176,242.00. The City of Bluefield believes based on the record as a whole that such an

increase in annual revenue for RGC Resources, Inc., would be fair and reasonable. Any

additional increase would be unfair to customers of BGC. At the Public Hearing, held on

June 26, 2007, citizens and customers of BGC made it clear that they are unable to afford

continuing rate increases given that most of them are on fixed incomes. Most of them realize

that utility rates in West Virginia have increased 67% over the past decade, twice the rate of

inflation in the general economy during the same period. Most of the increase in rates over

the last decade has been caused by the rise in the price of natural gas. Although BGC

customersj like customers of any other gas utility, are at the mercy of rising gas prices, they

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KATZ, KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

should not be held hostage to unreasonable rate increases not directly tied to the rise in the

price of natural gas. Since 1997, the cost of natural gas has increased 11 8%, while the cost of

all other utility services has increased only 17%. In short, the citizens of Bluefield who are

BGC customers cannot afford the rate increase that would attend the proposed additional

annual revenue increase of $323,853 as called for in the Joint Stipulation and in the CAD and

Staff filings. BGC customers have seen steady rate increases over the last several years under

RGC Resources, Inc. While the proposed increase is certainly not welcomed by the City of

Bluefield or BGC customers, the additional revenue increase of $176,242 is enough.

Therefore, the city of Bluefield requests that RGC Resources, Inc., be limited to a revenue

increase of $1 76,242 under the Rule 42 Tariff filing.

IV. Conclusion

FOR ALL THE FORGOING REASONS, the City of Bluefield respectively

requests that the Petitioners Petition to Transfer the Common Stock of BGC to ANGD, LLC,

be refused; that RGC Resources, inc., remain as owner and operator of BGC; and that RGC

Resources, Inc., be limited to an increase in revenue in the amount of $176,242; and for such

other and further relief as to the Commission may seem appropriate and just.

THE CITY OF BLUEFIELD WEST VIRGINIA, A Municipal Corporation

By Counsel,

KATZ,JCANT@R &,PERKINS, PLLC

WVptate Bar No. 1142 Katz, Kantor & Perkins, PLLC P.O. Box 727 Bluefield, WV 2470 1 (304) 327-3551

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KATZ, KANTOR & PERKINS. P.L.L.C. ATTORNEYS AT LAW

CERTIFICATE OF SERVICE

I, WAYNE L. EVANS, counsel for the City of Bluefield, do hereby certify that a

:opy of the foregoing “Initial Brief of Intervenor, City of Bluefield, West Virginia” has been

served upon the following parties of record by Certified MaiUReturn Receipt Requested this

t he21 day of July, 2007. dl

Christopher L. Callas, Esquire John Phillip Melick, Esquire Michael A. Albert, Esquire Jackson Kelly, PLLC PO Box 553 Charleston, WV 25322-0553 Counsel for BlueJield Gas Company

David A. Sade, Esquire Consumer Advocate Division 7fh Floor, Union Building 723 Kanawha Blvd, East Charleston, WV 25301

John Auville, Esquire PSC 201 Burks Street Charleston, WV 25301

Thomas N. Hanna, Esquire (WV State Bar# 1581) PO Box 3967 Charleston, WV 25339 Counsel for ANGD, LLC

David C. Smith, Esquire Smith & Scantlebury 307 Federal Street, Suite 205 Bluefield, WV 24701

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