state of alaska before the regulatory commission of …€¦ · docket no. u-16-____: june 1, 2016...

PREFILED DIRECT TESTIMONY OF JARED B. GREEN Docket No. U-16-____: June 1, 2016 of 32

STATE OF ALASKA

BEFORE THE REGULATORY COMMISSION OF ALASKA

Before Commissioners: Robert M. Pickett, Chairman Stephen McAlpine Rebecca L. Pauli Norman Rokeberg Janis W. Wilson

In the Matter of the Consideration of the Revenue Requirement Designated as TA 285-4 Filed by ENSTAR NATURAL GAS COMPANY, A DIVISION OF SEMCO ENERGY, INC.

) ) ) ) )

Docket No. U-16-____

PREFILED DIRECT TESTIMONY OF

JARED B. GREEN


PREFILED DIRECT TESTIMONY OF

JARED B. GREEN

TABLE OF CONTENTS

I. POSITION AND QUALIFICATIONS .........................................................................3

II. PURPOSE OF DIRECT TESTIMONY ........................................................................4

III. OVERVIEW OF RATE FILING...................................................................................5

IV. HISTORY AND OPERATIONS OF ENSTAR ............................................................9

V. ENSTAR HAS MADE SUBSTANTIAL NEW INVESTMENTS TO SUPPORT SAFETY AND RELIABILITY AND SERVE NEW CUSTOMERS..............................................................................................................21

VI. ENSTAR’S UNIQUE COMBINATION OF RISKS REQUIRES A RATE OF RETURN THAT WILL ADEQUATELY COMPENSATE INVESTORS AND ALLOW ENSTAR TO ATTRACT NEW CAPITAL TO ALASKA................23

VII. CONCLUSION ............................................................................................................32

EXHIBITS

Exhibit JBG-1 Current Resume of Jared B. Green

Exhibit JBG-2 Map of ENSTAR System


I. POSITION AND QUALIFICATIONS 1

Q. State your name, business address, and present position. 2

A. My name is Jared B. Green. My business address is 3000 Spenard Road, Anchorage 3

Alaska 99503. I am the President of ENSTAR Natural Gas Company (“ENSTAR”) 4

and of Alaska Pipeline Company (“APC”) and am appearing in that capacity in this 5

proceeding on behalf of ENSTAR and APC. For convenience, I will refer to 6

ENSTAR and APC together as “ENSTAR” or the “Company.” ENSTAR is a 7

division of SEMCO Energy, Inc. (“SEMCO”). 8

Q. Briefly describe your professional experience and educational background. 9

A. Since 2014, I have been President of ENSTAR and of Cook Inlet Natural Gas Storage 10

Alaska, LLC (“CINGSA”). Prior to assuming my current positions, I oversaw the 11

accounting, financial reporting, and internal controls for AltaGas Ltd. (“AltaGas”), 12

ENSTAR’s ultimate parent company. AltaGas is a publicly-traded, leading North 13

American energy infrastructure company with a focus on natural gas, power, and 14

utility operations in Canada and the United States. In addition to my positions within 15

ENSTAR, I also hold board positions for other companies within the AltaGas 16

organization. 17

Prior to becoming AltaGas’ Vice President and Corporate Controller in 2012, 18

I was responsible for the finance, accounting, financial reporting, and internal 19

controls for the utilities division of the organization, and was a senior member of the 20

strategy and regulatory oversight teams for AltaGas’ utility assets. I have been a lead 21

member of the due diligence teams for AltaGas’ utility acquisitions, namely Heritage 22

Gas Limited in 2009, Pacific Northern Gas Ltd. in 2011, and SEMCO in 2012. At 23

various times in my tenure at AltaGas, I have been a member of the Board of 24


Directors for SEMCO, AltaGas Utilities Inc., and Heritage Gas Limited, among 1

others. 2

I hold degrees in Economics and Commerce from the University of Calgary 3

and the University of Saskatchewan, respectively, and am a designated Chartered 4

Professional Accountant with the Institute of Chartered Professional Accountants of 5

Alberta. My resume is attached hereto as Exhibit JBG-1. 6

Q. Briefly describe your current professional responsibilities. 7

A. As President of ENSTAR, I am responsible for the day-to-day operations and 8

financial performance of the largest energy utility in Alaska. I direct all aspects of the 9

organization, including the Company’s safe operations, deployment of capital, and 10

regulatory strategy. I am the leader of 200+ dedicated employees and interface with 11

stakeholders external to the Company, including the Alaska State Legislature, the 12

executive branch, and other business leaders in Alaska. 13

Q. Have you previously testified before the Regulatory Commission of Alaska (the 14

“RCA” or the “Commission”) or any other regulatory commission? 15

A. Yes. I testified before the RCA in ENSTAR’s base rate case in 2014, Docket U-14-16

111, and in Docket U-15-016 relating to certain CINGSA issues. Additionally, I have 17

testified before the Alberta Utilities Commission on two occasions and once before 18

the British Columbia Utilities Commission. 19

II. PURPOSE OF DIRECT TESTIMONY 20

Q. What is the purpose of your direct testimony? 21

A. The purpose of my direct testimony is to provide a general overview of this rate 22

filing; to describe the history and operations of ENSTAR and the value ENSTAR 23

brings to its 141,000 customers in Southcentral Alaska; to describe the substantial 24


capital that has been invested by ENSTAR since its last rate case; and to describe the 1

importance to ENSTAR and the State of Alaska of maintaining a proper utility 2

investment environment, particularly given the unique risks that ENSTAR faces. 3

III. OVERVIEW OF RATE FILING 4

Q. What statutory standard applies to the Commission’s review of this filing? 5

A. Pursuant to Alaska Statute 42.05.141(a)(3), the Commission is empowered to “make 6

or require just, fair, and reasonable rates . . . for a public utility . . . .” To assist the 7

Commission in determining “just, fair, and reasonable rates” and in compliance with 8

the stipulation accepted by the Commission in Docket U-14-111(18) (“U-14-111 9

Stipulation”), ENSTAR has prepared a revenue requirement and cost of service study 10

that comports with 3 AAC 48.275(a) and (h). 11

Q. What is ENSTAR requesting in this filing? 12

A. ENSTAR requests an overall increase of 3.9% to allow the Company an opportunity 13

to recover its just and reasonable costs and earn a fair return of and on prudent capital 14

investments in ENSTAR’s transmission and distribution systems in Southcentral 15

Alaska, which investments were used and useful to provide service to ENSTAR 16

customers during the test year. Our rate filing includes a request to maintain our 17

current return on equity (“ROE”) of 12.55%, a proposed capital structure of 51.68% 18

equity and 48.32% debt, and a proposed cost of debt of 5.03%. 19

ENSTAR further requests an interim and refundable increase of 1.6%, to be 20

effective August 1, 2016. Finally, ENSTAR requests approval of its proposed rate 21

design and a change in the methodology it uses to apply storage fees, effective 22

October 1, 2016. 23


Q. Why is ENSTAR requesting an increase in base rates? 1

A. ENSTAR has made capital investments of $70.5 million and experienced increases in 2

annual operating expenditures totaling over $3.7 million since filing its last rate case. 3

These increases in investment and routine cost of doing business have resulted in 4

ENSTAR under-earning by a significant margin. An adjustment is necessary to 5

reflect the sizeable investments ENSTAR has made on its customers’ behalf and its 6

reasonable cost to provide safe and reliable service. 7

Q. From your perspective as the President of ENSTAR, what are some of the 8

important issues in ENSTAR’s rate filing? 9

A. We are presenting a case that reflects our actual cost of doing business and an ROE 10

that is fair and compensatory and will allow us to continue to attract capital at a 11

reasonable cost and invest in the ENSTAR system. We are also presenting a case that 12

fairly allocates our costs to provide service across our various customer classes. Our 13

mission to provide safe and reliable service is an important one that we take very 14

seriously, and it is critical that we recover our reasonable costs, earn a reasonable 15

return, and attract new capital to Alaska. So, in this sense, every element of our 16

request is important. 17

Most of our filing, however, should not be controversial. We are not 18

proposing any adjustments or proposals that are unique or abnormal, outside of the 19

transportation rate design, which ENSTAR developed in close coordination with the 20

electric utilities. As discussed in the direct testimony of ENSTAR witness Daniel M. 21

Dieckgraeff, we are proposing to use a test year-end rate base, which is different from 22

our last rate filing, but consistent with historical rate cases, reflects our actual levels 23


of capital investment, and is common practice in many other jurisdictions. We are 1

also proposing to continue the “gradualism” to full cost concept that was agreed to in 2

arriving at the rates for the U-14-111 Stipulation. In developing the rates in the U-14-3

111 Stipulation, the increase applied to the revenue requirement for any one rate class 4

was limited to 150% of the overall revenue requirement increase percentage, with the 5

difference proportionally reallocated to the revenue requirement of those rate classes 6

that had increases under the limit. ENSTAR is using the same 150% cap in 7

developing the rates it is proposing in this case. 8

As I will discuss in more detail later in my direct testimony, approval of our 9

requested ROE is important to ENSTAR and our ability to attract new capital to 10

Alaska. ENSTAR owns and operates both transmission and distribution systems that 11

are unlike any other in the United States and that face a unique bundle of risks. Our 12

ROE should reflect these risks and our commitment to Alaska, which is demonstrated 13

by our substantial new investment since our last rate filing. 14

Q. Please describe the rate filing package. 15

A. Our rate filing package includes the standard schedules and information required by 16

the RCA under the relevant statutes and regulations. In addition, our rate filing is 17

supported by my direct testimony, as the lead policy witness, and by direct testimony 18

from the following witnesses: 19

Robert B. Hevert Cost of Capital Expert

John D. Sims ENSTAR Benefits from Shared

Services and Corporate Services

Mark A. Moses SEMCO Energy, Inc. Shared


Services

Jillian Fan AltaGas Ltd. Corporate Services

Joshua C. Nowak Lead-Lag Study

Daniel M. Dieckgraeff Revenue Requirement and

Adjustments

Dr. Bruce H. Fairchild Cost of Service and Rate Design

Through our schedules and direct testimony, we present a case that satisfies the rate 1

filing requirements, supports reasonable rates that are fair to our customers and our 2

investors, and will allow us to continue our mission to invest in Alaska and provide 3

safe and reliable service. 4

Q. What rate design is ENSTAR considering for the electric utilities? 5

A. Over the past year, in part with the encouragement of the Commission, Southcentral 6

Alaska electric utilities have worked to increase the coordination and cooperation 7

among themselves relating to the generation of power for the region. The aim of this 8

coordination has been to serve their customer bases by pooling resources and assets to 9

most efficiently serve system need. After consulting with the electric utilities, 10

ENSTAR modified its rate structure for Very Large Firm Transport (“VLFT”) 11

customers and is offering a new rate schedule to assist the electric utilities in their 12

pooled efficiency goal. 13


IV. HISTORY AND OPERATIONS OF ENSTAR 1

Q. Please provide a brief history of ENSTAR. 2

A. ENSTAR1 was first organized in 1959 and won franchise elections from the 3

communities of Anchorage, Spenard, and Fairview that fall. Gas service began in the 4

summer of 1961 after ENSTAR completed the construction of a 12-inch pipeline 5

across the Kenai Peninsula from the Kenai Gas field, under Turnagain Arm, and into 6

Anchorage. During its early years, the Company faced severe competition from 7

heating oil suppliers and coal at the power plants. 8

On March 27, 1964, ENSTAR faced its greatest challenge in Company 9

history—the Good Friday Earthquake. A natural gas line broke at Second Avenue 10

and Post Road, shutting down the main power plant. ENSTAR crews worked around 11

the clock—from 5:30 p.m. on Friday through Monday—to run temporary lines above 12

ground to restore service to the power plant. It took the rest of summer for ENSTAR 13

to restore service to all of its service areas. 14

In step with the Municipality of Anchorage, ENSTAR grew exponentially in 15

the early 1970s. By 1971, it had become Anchorage’s largest taxpayer, serving 16

nearly 20,000 customers. In 1977, the same year the Trans-Alaska Pipeline delivered 17

the first barrel of oil to Valdez, ENSTAR was awarded Anchorage’s “Municipal 18

Beautification Award” for its recently completed administration building at 3000 19

Spenard Road, the office still in use today. As the years passed, ENSTAR prudently 20

invested in its system to ensure natural gas demand was met 24 hours a day, 365 days 21

a year to its customers, who now number approximately 141,000. 22

1 The Company was called Anchorage Natural Gas Corporation at that time; the Company was renamed ENSTAR Natural Gas Company in 1982.


Q. Please describe ENSTAR’s core values. 1

A. ENSTAR’s core values have remained steadfast and unwavering since its inception in 2

1959 and are as follows: 3

• Safety. Ensuring safety is at the forefront of everything we do. When our 4

Company talks about “safety,” we refer not only to the service that we 5

provide, delivering natural gas to our customers, but also to our priority to 6

operate safely during the workday and within the communities we serve. As 7

an example of the unwavering nature of this commitment, in 1973 ENSTAR 8

received an award from the American Gas Association (“AGA”) in 9

recognition of the utility’s outstanding motor vehicle safety record during 10

1972. Fast forward 42 years—in 2015, ENSTAR received the same 11

recognition from the AGA. This recognition was all the more meaningful 12

because our employees drove over 1,400,000 miles in 2015 to serve our 13

customers’ needs. Safety is at the forefront of everything our employees do, 14

and the result is providing a service that our customers have relied on for 55 15

years. 16

• Clean and Reliable. Providing a clean and reliable product to our customers 17

365 days a year. ENSTAR customers know that when they turn up their 18

thermostat, the natural gas is always there. ENSTAR demands the very best 19

from the natural gas producers it does business with regarding the quality of 20

its production. ENSTAR will not accept gas that is less than pipeline quality, 21

ensuring our customers receive a predictable and reliable product. Moreover, 22

natural gas is the cleanest burning source of fossil fuel-based energy. We take 23


extreme care to be stewards of the environment in which we work and provide 1

natural gas service. 2

• Service. Making investments in our community, our people, and our 3

customers—every employee is an ENSTAR ambassador. ENSTAR’s 4

obligation to its certificated area is not only to strive to provide consistent, 5

safe natural gas delivery and transportation, but also to serve our 6

communities. Over the past ten years, ENSTAR has contributed hundreds of 7

thousands of dollars and numerous volunteer hours to various organizations 8

across Southcentral Alaska. 9

• Dedication. Knowledgeable, passionate staff working together to provide 10

outstanding service. ENSTAR employs 200+ people2 from across 11

Southcentral Alaska. These employees, many of whom have been with the 12

Company for decades, are tremendously knowledgeable and passionate about 13

their profession. Each of our employees resides in the communities we serve 14

and takes pride in the important role that ENSTAR plays in those 15

communities. 16

• Integrity. Doing the right thing every time. ENSTAR senior management 17

meets quarterly with its employee base to provide various updates about the 18

Company, upcoming projects, and recent happenings. Every meeting opens 19

with a discussion on safety and is concluded with a final thought, “Every 20

employee is an ENSTAR ambassador. Do the right thing every time.” 21

2 All individuals who work in Alaska for ENSTAR are technically SEMCO employees, as ENSTAR is a division of SEMCO.


Q. Please describe ENSTAR’s physical plant. 1

A. ENSTAR is an integrated, hybrid system, composed of both natural gas transmission 2

and distribution assets. The transmission assets move gas from supply areas to large 3

consumers (such as power generation facilities) and our distribution system. Our 4

distribution assets deliver gas to smaller end-users such as homes, schools, and 5

hospitals. 6

ENSTAR’s transmission system is comprised of approximately 284 miles of 7

12- to 20-inch diameter pipeline and approximately 107 miles of smaller diameter 8

pipeline. The system’s present design delivery capacity is approximately 405-460 9

million cubic feet per day (“MMcf/d”). The transmission system consists primarily 10

of two pipeline systems that extend from various natural gas fields on both sides of 11

Cook Inlet into the Anchorage area. I have attached a simplified map to my direct 12

testimony as Exhibit JBG-2. The original pipeline system, the Kenai Pipeline 13

System, serves the east side of Cook Inlet and enters Anchorage from the south 14

through the Potter Gate Station. The other pipeline system, the Beluga Pipeline 15

System, serves the west side of Cook Inlet and enters Anchorage from the north near 16

ML&P’s Plant 2. The two pipeline systems are interconnected in Anchorage, 17

allowing the distribution system to serve customers from either pipeline system. The 18

origination points of the two pipeline systems are also interconnected by means of a 19

producer-owned pipeline, creating a full loop of the transmission system. 20

The Kenai Pipeline System was placed into service in 1961 and currently 21

receives gas from the Kenai, Beaver Creek, Swanson River, Ninilchik, Trading Bay, 22

and McArthur River gas fields, among others, as well as gas stored in the CINGSA 23


natural gas storage facility. The main trunk line of the Kenai Pipeline System 1

originates at the Kenai Gas Field and extends for approximately 75 miles to 2

Anchorage. It consists of two pipelines with diameters of 12 to 16 inches and 3

operates at pressures up to 1,025 pounds per square inch gauge (“psig”). ENSTAR 4

also has a 25-mile, 8-inch diameter pipeline that connects KPL Junction to 5

ENSTAR’s main trunk line. The CINGSA storage facility is connected to the Kenai 6

Pipeline System through a 4-mile, 16-inch diameter pipeline that ENSTAR completed 7

in 2015. 8

The Kenai Pipeline System includes a nine-mile, twin 12-inch diameter 9

crossing of the Turnagain Arm of Cook Inlet, landing at Potter Gate Station. The 10

crossing includes two separate pipelines that may be operated independently. 11

Powered by two compressor stations with an aggregate of 11,350 horsepower, the 12

system on the east side of the Inlet has a present delivery capacity of approximately 13

235-260 MMcf/d. 14

The transmission system on the west side of the Inlet, the Beluga Pipeline 15

System, was completed in 1984 and extends from the Beluga River gas field through 16

the Pretty Creek gas field, passing the Lewis River and Ivan River/Stump Lake gas 17

fields before reaching the Anchorage area. Along the mainline route, gas is provided 18

to Matanuska-Susitna Borough and Eagle River customers. The mainline operates at 19

pressures up to 1,025 psig and consists of a single 102-mile, 20-inch diameter line 20

with several smaller laterals extending service off of the main line. The Lewis River, 21

Pretty Creek, Ivan River, Stump Lake, Trading Bay, and McArthur River gas fields 22

are connected to the Beluga mainline by lines owned by the producers of the fields. 23


The present delivery capacity of this portion of the system is approximately 170-200 1

MMcf/d. 2

In 1991, ENSTAR connected its system to Hilcorp’s (then Marathon’s) newly 3

constructed Granite Point to Beluga pipeline, establishing a complete natural gas 4

pipeline loop around Cook Inlet. In 1992, ENSTAR completed a series of upgrades 5

to its transmission system to increase the amount and pressure of gas entering 6

Anchorage. As a result of those upgrades, ENSTAR is able to reverse the flow of the 7

Kenai Pipeline System and has often transported gas for industrial users from the 8

Beluga Field through Anchorage to Nikiski. 9

In 1995, ENSTAR was awarded a 33-year lease of the Department of 10

Defense’s Whittier to Elmendorf Air Force Base petroleum products pipeline. In 11

1996, ENSTAR converted the line to natural gas use, tied it into the ENSTAR 12

system, and began providing natural gas service to communities along the Turnagain 13

Arm. 14

ENSTAR’s transmission pipelines are constructed of externally coated, 15

welded steel, have impressed-current cathodic protection for corrosion prevention, 16

and are leak-surveyed at least annually. Substantially all of ENSTAR’s systems are 17

constructed and run through property owned by public and private third parties 18

pursuant to permits and right-of-way grants, which allow ENSTAR uninterrupted 19

possession and use of its systems. 20

Within the Anchorage area, ENSTAR owns and operates approximately 50 21

miles of 4-inch to 16-inch diameter transmission pipeline at an operating pressure of 22

460 to 685 psig. In addition, ENSTAR owns and operates approximately 28 miles of 23


4-inch through 12-inch diameter pipelines with operating pressures between 271 and 1

385 psig. These pipelines serve large customers and act as gas feeders for the 2

distribution system within the Anchorage area. 3

ENSTAR distributes natural gas through a network of approximately 3,000 4

miles of distribution pipeline, with approximately 126,000 service lines connecting 5

natural gas service to approximately 141,000 residential, commercial, and industrial 6

customers. The cities and environs served include Anchorage, Anchor Point, Big 7

Lake, Bird Creek, Butte, Eagle River, Girdwood, Homer, Houston, Indian, Kasilof, 8

Kenai, Knik, Palmer, Nikiski, Nikolaevsk, Soldotna, Wasilla, and Whittier. 9

Regulator stations reduce either transmission or intermediate pressure pipeline gas to 10

distribution pressure so that it may safely feed into the distribution system. Regulator 11

station designs vary, but are generally dual feed regulator stations with one active 12

pressure reduction run and a second backup run, with over-pressure protection 13

provided by relief valves. Most areas are served by more than one regulator station 14

interconnected by large diameter distribution pipelines. There are a few population 15

centers that are served by a single regulator station, with Girdwood and Homer as 16

examples of larger such communities. 17

The first distribution mains were placed into service in 1961. All mains are 18

either steel or high-density polyethylene (“PE”). Mains installed before 1972 are 19

made of steel. ENSTAR began installing PE mains in 1972, and by late 1974, 20

distribution mains less than 6 inches in diameter were routinely installed using PE. 21

Today, most 6-inch mains and some 8-inch mains are installed using PE, with larger 22

mains using externally-coated welded steel. Early service lines were constructed of 23


copper or externally-coated welded steel. About 2,500 copper service lines were 1

installed in the 1960s, of which some 1,430 remain in service today. Between 1966 2

and 1974, polyethylene-coated steel tubing was widely used. PE service line use 3

began in 1972 and by late 1974, service lines smaller than 2 inches in diameter were 4

installed using PE. Over 110,000 PE service lines are in use today. 5

Q. Has ENSTAR evaluated expansion to currently unserved communities? 6

A. Yes. 7

Q. What challenges does ENSTAR face when attempting to serve communities in 8

the outer reaches of the certificated area? 9

A. As stated in Governor Walker’s Inauguration speech on December 1, 2014, “the key 10

to every growing economy is low-cost energy. Alaska is rich in resources. We don’t 11

have a resource problem. We have a distribution problem . . . .” There are a number 12

of communities outside of the major population hubs in Southcentral Alaska, but still 13

within or near ENSTAR’s certificated area that desire natural gas service. These 14

communities (such as Seward, Kasilof, Willow, Nancy Lake, etc.) have asked 15

ENSTAR to extend natural gas service to their communities, but the projects are not 16

economically feasible on their own. Extension of service to these communities will 17

require some sort of contribution from others, over and above the direct contributions 18

from those requesting service. Even communities that currently have gas, like 19

Homer, could not have been served without contributions from others. Other 20

solutions need to be explored to bring gas to these communities. 21

Q. Please describe ENSTAR’s safety and service record. 22


A. ENSTAR’s safety record is excellent and its response time to reported incidents is 1

typically at or near the first quartile of the AGA best practice standards. For 55 years, 2

ENSTAR has developed its system with safety and reliability as its leading core 3

values. 4

The Company prioritizes expediency in responding to leaks on its natural gas 5

system. While the industry standard allows for certain types of leaks to be logged, 6

classified by magnitude, and monitored, ENSTAR does not tolerate leaks and 7

expediently remedies problems as they are identified. This practice helps not only to 8

ensure the ongoing safety of our customers and communities, but also helps keep 9

ENSTAR’s lost and unaccounted-for gas well below the industry average. Leak 10

control is a prudent operating policy for many reasons, including mitigating the risk 11

of gas migration where heavy frost conditions could result in lost gas finding its way 12

under frost and into buildings, with obvious safety risks. ENSTAR has also installed 13

automated meter reading devices throughout its service area and continues to analyze 14

efficiencies that promote safe and reliable service. 15

ENSTAR’s operations are regulated and routinely audited by the Pipeline and 16

Hazardous Materials Safety Administration (“PHMSA”). In addition to numerous 17

operations, maintenance, and construction requirements, ENSTAR continues to 18

comply with newer PHMSA regulations, such as Pipeline Integrity Management and 19

Distribution Integrity Management. 20

ENSTAR has a detailed Pipeline Integrity Management Plan that it developed 21

in 2004 following the Pipeline Safety Improvement Act of 2002. ENSTAR began 22

completing integrity assessments of its transmission pipelines in 2005, and by 2012 it 23


had completed applicable baseline integrity assessments. ENSTAR continues to 1

assess its transmission pipelines each year. These assessments provide valuable 2

information about the condition of the pipelines and help ENSTAR ensure safe and 3

reliable operations. 4

ENSTAR has a similar Distribution Integrity Management Program that was 5

developed following the passage of the Pipeline Inspection, Protection, Enforcement, 6

and Safety Act of 2006. Under this program, ENSTAR evaluates risks and threats to 7

its distribution system, documents and monitors performance, and takes proactive 8

measures to replace portions of its distribution system. ENSTAR also installs excess 9

flow valves on many newly constructed residential service lines. 10

ENSTAR attempts to deal quickly and fairly with all consumer requests and 11

complaints and has received feedback from customers that its record and 12

responsiveness is the best of utilities in its service area. 13

Q. What value does ENSTAR provide to the community? 14

A. Since 1961, ENSTAR’s number one priority has been to provide safe, reliable natural 15

gas service to its customers in Southcentral Alaska. It has accomplished this through 16

ongoing investments in its natural gas distribution and transmission systems; a focus 17

on excellence in its performance of maintenance of all of its system; and an 18

unrelenting focus on safety and reliability. Our customers have come to expect the 19

convenience of simply turning up their thermostat and the natural gas being there. 20

The existence of this affordable and convenient source of energy for space heating, 21

cooking, and other commercial and residential uses has helped propel the economic 22

development of Southcentral Alaska. 23


Q. How does ENSTAR provide this value to the community? 1

A. ENSTAR does so by prudently investing capital to ensure its system is regularly 2

maintained and improved upon; employing a lean and cost-effective workforce; and 3

continually emphasizing safety in every facet of its operations. 4

Q. Have ENSTAR’s costs to safely and reliably operate and maintain its system 5

increased since its last rate case? 6

A. Yes. ENSTAR’s operations and maintenance (“O&M”) expenses in the last test year, 7

2013, were approximately $30.6 million. This includes administrative and general 8

expenses, but does not include depreciation or property taxes. Since then, O&M 9

expenses have increased to $34.3 million in the 2015 test year, mainly due to labor 10

inflation, including contracted union wage increases and increasing health care costs; 11

safety-related costs with increased PHMSA regulation regarding pipeline integrity; 12

increased costs for employee operational qualification testing; and additional 13

personnel to monitor compliance efforts and regulatory changes. 14

Q. Notwithstanding these modest increases in O&M costs, how does the cost of 15

ENSTAR’s service compare to the cost of natural gas service in other 16

jurisdictions in the United States, exclusive of gas commodity cost? 17

A. ENSTAR provides natural gas delivery service to our customers at one of the lowest 18

costs in the entire country. Following approval of this rate application, the cost of 19

natural gas delivery service (combining the customer charge and the service charge, 20

and excluding gas commodity costs) for ENSTAR’s G1 Gas Sales customers will be 21

$3.09 per Mcf. This is well below the national average cost for natural gas 22

distribution service during 2015 as reported by the Energy Information 23


Administration of $6.13 per Mcf. The Company takes tremendous pride in our safety 1

and reliability record and the fact that our costs for transmission and distribution 2

service are lower than almost all state and national averages. 3

Q. Has ENSTAR done an analysis of the historical rate of increase in its residential 4

base rates (exclusive of gas costs)? 5

A. Yes, and it shows an increase of approximately 0.87% per year since 1985. 6

Q. How did ENSTAR conduct this analysis? 7

A. ENSTAR compared 2016 rates to 1985 rates using the following methodology: 8

• The actual customer charge per month in 1985 was $4.50, and the actual base 9

ENSTAR rate per CCF was $0.15896. Using the current monthly average 10

customer use of 124.2 CCF, the annual ENSTAR portion of a customer’s bill 11

would be $290.91. 12

• The 2016 customer charge per month is $16.00, and the base ENSTAR rate per 13

CCF is $0.12682. Using the same average customer use of 124.2 CCF, the 14

current annual ENSTAR portion of a customer’s bill is $381.01. 15

• The current monthly average customer usage was used in both portions of the 16

calculation in order to eliminate changes due to changes in customer consumption 17

habits. 18

• This analysis equates to an average increase in residential base rates of 0.87% per 19

year since 1985. 20

Q. How does that annual rate of increase compare to the overall inflation rate in 21

Anchorage? 22


A. The average inflation rate over that same time period is 2.53% per year, using the 1

Anchorage Consumer Price Index from 1986 to 2015. The Anchorage CPI for 1985 2

is not included, as that was the base year for this analysis, and the Anchorage CPI for 3

2016 is also not included as it has not yet been determined. 4

V. ENSTAR HAS MADE SUBSTANTIAL NEW INVESTMENTS TO SUPPORT 5 SAFETY AND RELIABILITY AND SERVE NEW CUSTOMERS 6

Q. What values drive ENSTAR’s investment decisions? 7

A. ENSTAR’s operating procedures are based on natural gas transmission and 8

distribution industry standards, best practices, and ENSTAR’s expertise operating in 9

Alaska’s unique environment. With Alaska’s rugged environment and subarctic 10

temperatures, it is critical that ENSTAR prudently maintain its transmission and 11

distribution systems. Approximately 141,000 customers depend on ENSTAR to keep 12

their homes, businesses, schools, and hospitals warm. ENSTAR takes its obligations 13

very seriously, having invested $70.5 million in utility plant since the 2013 test period 14

of the last rate case. 15

Q. What capital investments has ENSTAR made since its last rate filing test year? 16

A. ENSTAR’s prudent investments include the following: 17

• installation of a new 4.2-mile transmission pipeline from the CINGSA 18

storage facility to connect directly into the ENSTAR transmission system, 19

creating redundancy of access to CINGSA, saving ENSTAR’s customers 20

in the cost to transport gas, and conserving energy by allowing CINGSA’s 21

higher pressure gas to flow into the transmission system without the need 22

for pressure decreases and later recompression ($11.7 million); 23


• replacement of two aging compressors (1970 vintage) at Gudenrath to 1

provide the required deliverability of gas from the Kenai Peninsula to 2

Anchorage ($9.0 million); 3

• replacement of the 20-inch diameter transmission pipeline at the Beluga 4

River crossing after the river bank receded, exposing the original line 5

($2.5 million); 6

• replacement of the Potter Gate Station (1961 vintage), including the 7

addition of equipment to make the twin 12-inch diameter transmission 8

pipelines across the Turnagain Arm “piggable” – meaning capable of 9

being internally inspected for corrosion, degradation of wall thickness, or 10

other potential risks via inline smart pipeline inspection gauges, or “pigs” 11

($2.3 million); 12

• replacement of aged stations and pipeline infrastructure in accordance 13

with integrity management requirements; 14

• replacement of approximately 50,000 Encoder Receiver Transmitters 15

(ERTs), a packet radio protocol used for automatic meter reading, which 16

had reached the end of their 15-year battery design lives; 17

• installation of 113 miles of distribution mains to bring natural gas to more 18

customers; 19

• installation of service lines to connect 4,640 new customers; and 20

• the purchase of equipment and general plant to allow ENSTAR’s 21

employees to perform emergency response, safety, construction, service, 22


maintenance, line locating, leak surveying, atmospheric corrosion, and 1

integrity management activities. 2

Q. Are the investments made by ENSTAR since its last case in service and used and 3

useful to serve ENSTAR’s customers? 4

A. Yes. All of the investments that I just described were in service during the test year 5

and are currently being used to provide natural gas transmission and distribution 6

services to our customers. 7

Q. Are the investments made by ENSTAR since its last case reasonable and 8

necessary to provide service and were the investments prudently incurred? 9

A. Yes. ENSTAR only makes investments that are necessary to ensure safe and reliable 10

service to our customers and to provide efficiency in day-to-day operations. Each 11

investment decision is made, first and foremost, with our customers’ interests in 12

mind, consistent with good utility practices. Each investment I have described is 13

directly related to our core mission and consistent with our core values. Additionally, 14

we work hard to ensure that all investments are made prudently and at a reasonable 15

cost, consistent with our corporate culture and how we operate our business every 16

day. 17

VI. ENSTAR’S UNIQUE COMBINATION OF RISKS REQUIRES A RATE OF 18 RETURN THAT WILL ADEQUATELY COMPENSATE INVESTORS AND 19 ALLOW ENSTAR TO ATTRACT NEW CAPITAL TO ALASKA 20

Q. What ROE is ENSTAR seeking? 21

A. ENSTAR is requesting an ROE of 12.55%, which is the same as our most recently 22

adjudicated ROE. Our request for a 12.55% ROE is consistent with the 23

recommendation of ENSTAR witness Robert B. Hevert, whose direct testimony 24

provides a recommended range of ROE for ENSTAR of between 12.50% and 25


14.00%. For a variety of reasons, which I will discuss and which are also discussed 1

in the direct testimony of Mr. Hevert, ENSTAR is a unique transmission and 2

distribution utility operating in an increasingly challenging environment. 3

Q. What is your basis for requesting this ROE? 4

A. An ROE of 12.55% is near the low end of Mr. Hevert’s recommended range, which 5

reflects that ENSTAR consists of both transmission and distribution systems, the 6

current capital market risks faced by all companies, and the specific risks unique to 7

ENSTAR. Maintaining the status quo with respect to ROE will help ensure 8

ENSTAR’s continued ability to attract new capital and send appropriate signals to 9

debt and equity investors that Alaska is still a good place to invest. ENSTAR was 10

able to attract the capital required to finance its necessary investments in 2014 and 11

2015 with the previously-approved 12.55% ROE, and I believe that it is important to 12

maintain that ROE to attract investment going forward at a reasonable cost. 13

The requested 12.55% ROE is a rate of return at which I am confident that 14

ENSTAR can obtain the equity capital to fund the required investments to ensure 15

safe, reliable service and connect new customers to our system. Energy capital 16

markets have become constrained in recent months with the downturn in world oil, 17

natural gas, and natural gas liquids prices, which puts significant pressures on an 18

energy company’s ability to attract investment capital. In other words, with the 19

downturn in energy markets, it has become more difficult to attract debt and equity 20

investments. We do not expect this downturn to reverse in the near term. In addition, 21

2014 and 2015 actual earnings for ENSTAR were significantly lower than the 22

allowed 12.55% ROE. 23


The combination of the downturn in the energy markets, the clear risk and 1

volatility of earnings facing ENSTAR, and the identified market range recommended 2

by Mr. Hevert, which takes into account the unique risks faced by ENSTAR, all 3

support the reasonableness of ENSTAR’s requested 12.55% ROE. While this ROE 4

provides no guarantee of earnings, it should be sufficient for ENSTAR to continue to 5

fund its necessary investments for safe, reliable service and connect new customers in 6

its franchise areas. 7

Q. Please elaborate on the factors affecting earnings for ENSTAR. 8

A. Over the past few years, returns on invested capital have been strained by 9

Southcentral Alaska’s warm weather and also by the timing lag between (a) when the 10

funds are invested and (b) when ENSTAR is able to begin generating revenue from 11

those investments. While these are not the only two factors that may impact income, 12

they are the most prominent items decreasing ENSTAR’s earnings on investments it 13

has prudently made in its system. 14

In 2014 and 2015, ENSTAR generated net income of $8.5 million and $10.9 15

million, respectively. This contrasts with a calculated net income requirement of 16

$17.7 million to support a 12.55% allowed ROE on ENSTAR’s 2013 test year rate 17

base as applied for in U-14-111. In addition, of the $70.5 million invested from 2013 18

to 2015, $49.8 million was for non-income producing system betterment and general 19

plant. “Non-income producing plant” is investment that does not result in nor is 20

intended to significantly increase customer connections. ENSTAR has not earned its 21

return on these non-income-producing investments, and yet ENSTAR has fully 22


financed the cost of these investments. These investments will continue to be 1

financed by ENSTAR until its rate case is fully adjudicated by the Commission. 2

Q. Are there other factors that will potentially affect earnings in the near future? 3

A. Yes. The current and prospective local economic conditions in Alaska have a strong 4

potential to affect ENSTAR’s earnings. The State of Alaska is facing an imminent 5

budget deficit of upwards of $3.5 billion, requiring unprecedented action by Alaska’s 6

leaders to increase state revenue and decrease spending. S&P recently downgraded 7

Alaska’s credit rating from AAA to AA+, finding that the state’s current budget 8

deficit is “unsustainable.” 9

The fiscal situation in Alaska is merely indicative of the overall condition of 10

the Alaskan economy. The collapse in oil prices has significantly impeded the oil and 11

gas industry in Alaska. As a result, Alaska’s workforce, which is highly dependent 12

on the oil and gas industry, has already seen heightened unemployment in the oil and 13

gas and other related industries. The Alaska Department of Labor & Workforce 14

Development is estimating a loss of 2,500 jobs for the fiscal year 2016 alone. 15

As the Commission is no doubt aware, this is not the first time that Alaska has 16

faced an economic crisis. Alaska survived a major recession in 1977 following the 17

completion of the Trans-Alaska Pipeline, due in part to strong commodity prices in 18

the energy and fishing industries. In the mid-late 1980s, Alaskans suffered through 19

the worst economic downturn since statehood, when, in 1986, oil prices slid to below 20

$10 per barrel. Much like the current crisis, state revenues and spending plummeted 21

and jobs were lost at an alarming rate, impacting the housing market and causing 22

material increases in bad debt and uncollectible accounts for ENSTAR. 23


The risk to ENSTAR is not limited to bad debt and uncollectible accounts. 1

There is potential for negative impacts on ENSTAR’s total customer count as jobs are 2

lost and workers look for other opportunities outside of Alaska. Struggling families 3

and others affected by the economic downturn are likely to shift into conservation 4

mode, which has the potential to reduce consumption of natural gas. 5

Alaska will no doubt survive the current economic crisis, much as it did in the 6

1970s and 1980s. State leaders are working hard to address the budget deficit and 7

reform the Alaskan economy. But the current challenges are real, and investors will 8

consider them when deciding where to put their money. These factors should be 9

considered by the Commission in establishing an ROE for ENSTAR that will allow it 10

to successfully attract new capital, as it has since its last rate filing in 2014. 11

Q. Please elaborate how ENSTAR’s earnings are affected by the time lag between 12

(a) when funds are invested and (b) when ENSTAR is able to fully generate 13

revenue from those investments. 14

A. ENSTAR’s financing costs, both debt and equity, begin immediately when investors 15

provide capital to ENSTAR. Yet, revenue associated with the majority of these 16

investments lags significantly behind the date of investment. The lag exists due to the 17

fact that utility rates in Alaska are set based on historical test years and also due to the 18

expanded statutory timeline for rate cases in Alaska. Additionally, ENSTAR does not 19

have a capital investment tracker mechanism, which is a feature employed in many 20

jurisdictions. Finally, the use of a 13-month average rate base in ENSTAR’s rate 21

cases further exacerbates the lag problem because it ignores actual investments that 22

have been made and placed in service during the test year. As a result of these lag 23


risks, revenue will not be generated for most of ENSTAR’s investments until many 1

years after the investments are made. While all utilities experience lag to some 2

extent, the combination of factors that I have described make revenue lag a serious 3

risk for ENSTAR that investors will consider. 4

From a net present value or an internal rate of return perspective, delays in 5

revenue generation have significant negative impacts on the actual returns for an 6

investment. The following is a real example for ENSTAR. In spring 2015, ENSTAR 7

spent $2.5 million replacing a section of the Beluga pipeline after the bank of the 8

Beluga River had eroded away, leaving the pipeline exposed. The funds for this 9

project were fully deployed in early 2015 and the asset was in service by May of that 10

year, helping to safely deliver gas to ENSTAR’s customers. ENSTAR, however, 11

generated zero revenue from this capital investment in 2015. Indeed, ENSTAR will 12

not be able to fully recover the financing costs of this investment until late 2017, 13

when final rates are set. In this case, there will be almost 2.5 years between the time 14

when the funds were released and spent by ENSTAR and when it can recover its 15

costs in rates. 16

The delay between the investment date and the date when ENSTAR can 17

generate revenues from those investments means the real ROE available to ENSTAR 18

for its investments is much lower than the “allowed” ROE ENSTAR has requested in 19

this rate case. 20

As Mr. Dieckgraeff discusses in his testimony, Regulatory Research 21

Associates has concluded that: “In a construction cycle, when new capital spending is 22


outpacing depreciation, this timing mismatch is perhaps the single largest contributor 1

to a utility’s failing to earn its authorized ROE.”3 2

Q. How is ENSTAR treating revenue generated in the test year from capital 3

investments made in 2015 in its rate application? 4

A. There are two types of capital investment that ENSTAR made in the 2015 test year: 5

(1) revenue generating investments and (2) non-revenue producing system betterment 6

and general plant investments. 7

1. For revenue generating investments such as new mains, service lines, and 8

meters to connect new customers, ENSTAR is generally able to generate 9

revenue in the year the investment is made. As detailed in Mr. Dieckgraeff’s 10

testimony, we are making adjustments to revenue in this rate case to reflect 11

the full year of revenue, which properly matches test year revenues to the 12

year-end capital. 13

2. For non-revenue producing system betterment and general plant investments, 14

no revenue was generated on the investments during the 2015 test period. 15

These assets are fully in service at the start of the rate effective period, 16

customers are benefiting from these assets, and ENSTAR has 100% financed 17

these assets prior to the start of the rate effective period. As shown in Mr. 18

Dieckgraeff’s testimony, we are reflecting these investments as test year-end 19

capital. 20

Q. Why is ENSTAR proposing to use a 13-month average rate base for its interim 21

and refundable increase, while proposing a test year-end rate base for its 22

permanent rates going forward? 23 3 Regulatory Focus, pp. 5-6, January 16, 2015.


A. The rate base reflected in ENSTAR’s rate application reflects the capital invested by 1

ENSTAR as of December 31, 2015, the end of the 2015 test year. The first interim 2

and refundable rate increase for ENSTAR from the last rate case was effective 3

January 1, 2016. Final rates in this case are not expected to be put in place until late 4

2017, both periods being after the full capital was invested and the assets were placed 5

into service for the benefit of the customers. As discussed by Mr. Dieckgraeff, 6

utilizing a test year-end rate base properly matches the rates with the financing costs 7

and depreciation of the assets. As further discussed by Mr. Dieckgraeff, 8

synchronization of revenues from new business during the test year has been 9

completed and presented in the present filing. 10

As per the Commission’s long-standing policy, however, utilities must use a 11

13-month average rate base for the interim and refundable increase. ENSTAR has 12

prepared this calculation for the purposes of the interim and refundable increase. To 13

note, during the interim period, ENSTAR will be incurring full financing costs for the 14

capital deployed and the customers will be benefitting from full use of the assets, but 15

rates will only reflect a 13-month average of the investments. This further illustrates 16

the cost to ENSTAR of the time lag between when funds are invested and when 17

ENSTAR is able to begin generating revenue from those investments. 18

Q. If the Commission adopts the Company’s proposal to use test year-end rate base 19

for permanent rates going forward rather than the 13-month average rate base, 20

will that mitigate the lag risk to which ENSTAR is exposed? 21

A. Not entirely. Adoption of test year-end rate base will relieve some of the lag risk, but 22

for the reasons that I discussed previously and that Mr. Hevert addresses in his 23


testimony, ENSTAR will still have substantial revenue lag as compared to most other 1

utilities in the Lower 48. 2

Q. Besides regulatory lag, are there any other important factors that the 3

Commission should consider in setting a fair and compensatory rate of return 4

for ENSTAR? 5

A. Yes. ENSTAR is a unique utility in many respects. Investors understand the unique 6

risks that ENSTAR faces and make investment decisions based upon those risks. I 7

have already discussed a number of these risks, including that we operate both 8

transmission and distribution systems, our unique regulatory lag, the downturn in the 9

energy markets and resulting impacts on economic growth in Alaska, and certain 10

other unique features that make operating a utility in Alaska challenging. Other risk 11

factors are discussed throughout the Company’s direct testimony filed in this case, 12

and include risk associated with weather variations due to ENSTAR’s lack of a 13

weather normalization mechanism and ENSTAR’s natural gas supply risk given its 14

limited supply options. 15

Q. What is the nature of ENSTAR’s natural gas supply risk? 16

A. ENSTAR has partial commitments to meet its gas supply through 2023, all of which 17

are sourced from the only economically available supply basin—Cook Inlet—and 18

most of which comes from one dominant producer. The short duration of these gas 19

supply commitments contrasts with ENSTAR’s obligation to serve its existing 20

customers, which is without time limit. This is further contrasted with the 21

investments ENSTAR made to serve those customers—its most recent plant 22

investments won’t be fully recovered until after 2065. 23


In contracting for the period after 2018, when all of its existing contracts 1

expire, ENSTAR sought to ensure a significant portion of its gas supply portfolio would 2

be from non-dominant producers in order to diversify ENSTAR’s supplier risk and to 3

ensure a market exists for smaller producers to continue to invest in the region. While 4

ENSTAR has aimed at diversifying its suppliers, there are only a handful of potential 5

suppliers in the Cook Inlet, which makes real diversification impossible. Further, 6

ENSTAR cannot easily geographically diversify because Cook Inlet is not connected 7

to any external supply pipeline or other producing area. 8

Q. Has the Commission historically recognized these risks in adjudicating 9

ENSTAR’s previous rate cases? 10

A. Yes, as discussed in Mr. Hevert’s testimony, each time the Commission has 11

adjudicated ENSTAR’s ROE, it has granted an ROE that is higher than the national 12

average for natural gas utilities. 13

VII. CONCLUSION 14

Q. Does this conclude your direct testimony? 15

A. Yes it does. 16

Docket U-16-___ Exhibit JBG-1 Page 1 of 1

Jared B. Green

EMPLOYMENT

AltaGas Ltd. and SEMCO Energy, Inc. 2004-2005, 2007-Present

President (ENSTAR Natural Gas Company and Alaska Pipeline Company)

President (Cook Inlet Natural Gas Storage Alaska, LLC)

Vice President and Corporate Controller, AltaGas Ltd.

Vice President Controller and Corporate Secretary, AltaGas Utility Group Inc.

Director Strategic Development, AltaGas Utility Group Inc.

Team Leader Corporate Reporting and Controls, AltaGas Ltd.

Enterra Energy Trust 2005-2007

Manager Financial Reporting

Eagle Energy Marketing 2005

Director Risk Control

Forzani Group Limited 2003–2004

Senior Financial Analyst

Deloitte & Touche LLP 2000-2003

Senior Associate

EDUCATION

University of Calgary: Bachelor of Arts, Economics, 1998

University of Saskatchewan: Bachelor of Commerce (distinction), Accounting, 1999

Institute of Chartered Professional Accountants of Alberta, 2003

OTHER

Western Energy Institute Board of Directors Various Officer and Board of Director positions within the AltaGas organization

Other Natnrm Cta s Systems

- Natwal Gas Systems OWnl!d By Prodl.lCt!r..

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Docket U-16-___

AnchorPoin

Exhibit JBG-2

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Map of ENSTAR System

state of alaska before the regulatory commission of …€¦ · docket no. u-16-____: june 1, 2016...

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