1 1 STATE OF NEW HAMPSHIRE 2 PUBLIC UTILITIES COMMISSION 3 October 19, 2004 - 10:37 a.m. Concord, New Hampshire 4 5 RE: DG 04-162 6 NORTHERN UTILITIES, INC. - N.H. DIVISION: Winter Period 2004-2005 Cost of Gas. 7 8 PRESENT: Chairman Thomas B. Getz, Presiding 9 Commissioner Graham J. Morrison 10 11 Diane Bateman, Clerk 12 13 APPEARANCES: Reptg. Northern Utilities, Inc.: Patricia M. French, Esq. 14 Reptg. Residential Ratepayers: 15 Kenneth E. Traum, Asst. Consumer Advocate Office of Consumer Advocate 16 Reptg. PUC Staff: 17 Edward N. Damon, Esq. 18 19 20 21 22 23 24 Court Reporter: Steven E. Patnaude, CCR 2 1 I N D E X 2 PAGE NO. 3 WITNESS PANEL: JOSEPH A. FERRO FRANCISCO C. DaFONTE 4 5 Direct examination by Ms. French 6 6 Cross-examination by Mr. Traum 26 7 Interrogatories by Chairman Getz 40 8 Cross-examination by Mr. Damon 42 9 Redirect examination by Ms. French 60 10 11 * * * 12 13 E X H I B I T S 14 EXHIBIT NO. D E S C R I P T I O N PAGE NO. 15 1 Winter 2004-2005 Cost of gas filing 7 16 2 Revision to Proposed COG filing 13 17 3 Partial Settlement of DG 04-162 20 re: Local Dist. Adjmt. Clause 18 4 Revised Tariff Sheets regarding 26 19 annual update of Appendices A and C (CONFIDENTIAL & PROPRIETARY) 20 5 RESERVED (Record request for 52 21 template of Program Year 2 energy efficiency programs) 22 23 24 {DG 04-162} (10-19-04) 3 1 P R O C E E D I N G S 2 CHAIRMAN GETZ: Okay. We'll open the 3 hearing in docket DG 04-162, Northern Utilities, Inc. On 4 September 15, Northern filed with the Commission its cost of 5 gas for the period November 1, 2004 through April 30, 2005 6 and its Local Delivery Adjustment Charges and supplier 7 balancing charges for the period November 1, 2004 through 8 October 31, 2005. The proposed residential cost of gas rate 9 is 93.45 cents per therm, a 5.95 cents per therm decrease 10 over the residential rate per therm for last winter. Among 11 other things, the filing proposes an increase of 0.19 cents 12 per therm in the Environmental Surcharge, an increase of 13 0.05 cents per therm in the Wells Surcharge, a decrease of 14 1.65 cents per therm in the Conservation Charge for 15 residential customers, and a decrease of 2.52 cents per 16 therm in the Conservation Charge for C&I customers. An 17 order of notice was issued on September 21 setting the 18 hearing for this morning. 19 Can we take appearances please. 20 MS. FRENCH: Patricia French, from 21 NiSource Corporate Services, 300 Friberg Parkway, 22 Westborough, Massachusetts, on behalf of Northern Utilities. 23 Good morning. 24 MR. TRAUM: Good morning, Mr. Chairman {DG 04-162} (10-19-04) 4 1 and Commissioner. This time, representing the Office of 2 Consumer Advocate, Kenneth Traum. 3 CHAIRMAN GETZ: Good morning. 4 CMSR. MORRISON: Good morning. 5 MR. DAMON: Edward N. Damon, for the 6 Staff. And, with me is Robert Wyatt, Stephen Frink, and Jim 7 Cunningham. 8 CHAIRMAN GETZ: Good morning. Are there 9 any preliminary matters, before we hear from your witness, 10 Ms. French? 11 MS. FRENCH: I don't know if it's 12 appropriate, Mr. Chairman, we did file a motion for 13 confidential treatment in this docket regarding two 14 appendices that were filed with the initial filing. I don't 15 know if that's a matter that has been decided or anything 16 you want to hear about that today, but that is still a 17 pending motion before the Commission. 18 CHAIRMAN GETZ: Well, I'll just ask, is 19 there any objection to that motion from either of the other 20 parties? 21 MR. TRAUM: No, sir. 22 MR. DAMON: Staff would just note that I 23 think the Commission has approved these sorts of motions in 24 the past for the type of information that's requested. {DG 04-162} (10-19-04) 5 1 However, there is an additional request in this motion to 2 make this a standing order. So, to a certain extent, that 3 may add a policy question that is facing the Commission with 4 this motion that may not have been in the past. 5 MS. FRENCH: As I explained to 6 Mr. Damon, when I first -- when he and I first discussed 7 this matter, I had made a similar motion in Maine, and it 8 was favorably received by Maine, because these are the types 9 of repetitive motions that they receive in cost of gas 10 filings regarding material that's in each filing exactly the 11 same. And, my request here would be that, making the 12 request this time, that we can continue to file this as a 13 confidential document, without having to repeat the motion 14 and the paperwork on each occasion every year. I drafted it 15 in that manner asking for a standing motion, if that meets 16 the Commission's, you know, desires for administrative 17 efficiency, but, basically, we're looking for protection 18 over material that we have sought protection for and has 19 been granted in the past. 20 CHAIRMAN GETZ: Okay. Thank you. We'll 21 take that matter under advisement. 22 MS. FRENCH: Thank you, Mr. Chairman. 23 We have Mr. Joseph Ferro as the witness in this proceeding 24 and Mr. Chico DaFonte. We'd like to put them on a panel {DG 04-162} (10-19-04) 6 [Witness Panel: Ferro|DaFonte] 1 this morning together. I'd like to correct the record. 2 Mr. DaFonte's first name is "Francisco", middle initial "C". 3 (Whereupon Joseph A. Ferro and Francisco 4 C. DaFonte was duly sworn and cautioned 5 by the Court Reporter.) 6 CHAIRMAN GETZ: Please. 7 JOSEPH A. FERRO, SWORN 8 FRANCISCO C. DaFONTE, SWORN 9 DIRECT EXAMINATION 10 BY MS. FRENCH: 11 Q Good afternoon, Mr. Ferro and Mr. DaFonte. 12 A (Ferro) Good morning. 13 A (DaFonte) Good morning. 14 Q Mr. Ferro, would you please state your full name, your 15 business address and your title for the record? 16 A (Ferro) My name is Joseph A. Ferro. My business 17 address is 300 Friberg Parkway, Westborough, 18 Massachusetts. My title is Manager of Regulatory 19 Policy for Bay State Gas and Northern Utilities. 20 Q Have you testified before this Commission in the past 21 with regard to cost of gas filings for the New 22 Hampshire Division of Northern Utilities? 23 A (Ferro) Yes, I have. 24 MS. FRENCH: Mr. Chairman, we have {DG 04-162} (10-19-04) 7 [Witness Panel: Ferro|DaFonte] 1 premarked this "Exhibit 1" for identification. Is that 2 appropriate? Do you need to do anything further with it? 3 CHAIRMAN GETZ: No, it will be so 4 marked. 5 (The document, as described, was 6 herewith marked as Exhibit 1 for 7 identification.) 8 MS. FRENCH: Thank you. 9 BY MS. FRENCH: 10 Q I'm showing you a document that has been premarked 11 "Exhibit 1" for identification in this matter. Can you 12 identify that document? 13 A (Ferro) Yes, I can. 14 Q What is it? 15 A (Ferro) It is the Company's filing of its Winter Period 16 November 2004 through October (April?) 2005 cost of gas 17 filing, including the prefiled testimony of myself, 18 Joseph A. Ferro, and the prefiled testimony of our 19 Director of Energy Supply Services, Francisco C. 20 DaFonte, with supporting schedules. 21 Q Was this filing prepared by you or under your direct 22 supervision and control, with the exception of 23 Mr. DaFonte's testimony and exhibits, which I will have 24 him separately identify? {DG 04-162} (10-19-04) 8 [Witness Panel: Ferro|DaFonte] 1 A (Ferro) Yes. Yes, it was. 2 Q Would you describe that filing in some detail for the 3 record. 4 A (Ferro) Certainly. The filing is fairly thick. It's 5 comprised of several sections. Starts off with a cover 6 letter address introducing the prefiled testimony, and 7 then the next section is my prefiled testimony, and 8 then the next section is the prefiled testimony of 9 Francisco DaFonte. And, then, the next section is our 10 gas supply exhibits that were filed by Mr. DaFonte. 11 Following the gas supply exhibits, the filing includes 12 94 pages of supporting material and documentation, 13 including the tariff page that shows the calculation of 14 the cost of gas and the Local Delivery Adjustment Cost 15 rate. It also provides a section of gas cost exhibits 16 that show the cost of the gas projected for the 17 upcoming period. Shows next section our forecasted 18 sales exhibits of how we -- the results of our forecast 19 demand. The next section is the allocation exhibits, 20 showing the allocation factors between the two states 21 of New Hampshire and Maine. And, then, we have 22 exhibits relating to supply and prices, which shows the 23 natural gas prices, the pipeline prices. There's an 24 inventory section that shows the simulation of {DG 04-162} (10-19-04) 9 [Witness Panel: Ferro|DaFonte] 1 underground storage, LNG and propane inventory, 2 resulting in an average inventory rate that is used to 3 price out the period, the projected period sendout for 4 those supply sources. The next section is the Capacity 5 Release section, which is our forecast of revenues 6 realized from Northern releasing its excess capacity. 7 The next section is interest on the deferred gas costs 8 from May 2004 through the forecast period November 2004 9 through April 2005. The next section is the lost and 10 unaccounted for gas, which essentially is taking the 11 forecasted sales and the non-grandfathered volumes of 12 transportation and converting that and showing how we 13 get to the forecasted sendout, which is priced out. 14 The difference between the sendout and the sales is the 15 lost and unaccounted for gas, as well as company use. 16 The next section is Northern's variance analysis, 17 comparing this proposed cost of gas with the cost of 18 gas that was actually charged last winter, showing the 19 components, such as demand and commodity and under -- 20 and prior period components, showing where the 21 increases and the decreases are. The next section is 22 the typical bill analysis, showing the monthly, the 23 seasonal and the annual bill comparisons of this 24 proposed rate versus the actual cost of gas charged {DG 04-162} (10-19-04) 10 [Witness Panel: Ferro|DaFonte] 1 last winter. The next section is a hedging section, 2 showing Northern's hedging information and results. 3 And, in this case, showing a gain of its hedges based 4 on the NYMEX prices reflected in the forecast. The 5 next section is related to the components of Northern's 6 local delivery adjustment costs, and, in particular, 7 the Wells LNG Surcharge and the Environmental Response 8 Cost rate. There is one other DSM charge -- I'm sorry, 9 there is one other LDAC charge, and that is the DSM, 10 Demand-Side Management Conservation Charge. That is 11 not in that section, I might add, it's in -- it was 12 supported and detailed in a separate filing under the 13 same letter dated September 14th. The next section is 14 the prior period reconciliation of last period's winter 15 gas costs and gas cost collections. The next section 16 is the interruptible sales section, showing 17 interruptible sales volumes and resulting margins that 18 get credited to our firm sales customers. The next 19 section is the exhibits relating to Northern's sendout, 20 essentially showing the forecasted dispatch of supply 21 volumes by resource type, by month, under normal 22 conditions, as well as under design year conditions. 23 We have another section that shows that -- the winter 24 related costs that are incurred in the summer period {DG 04-162} (10-19-04) 11 [Witness Panel: Ferro|DaFonte] 1 and deferred to the winter, known as "summer deferred 2 costs". And, I think that's about what covers the -- 3 that covers the entire filing. 4 Q Thank you. Would you please briefly summarize your 5 testimony for the Commission. 6 A (Ferro) Certainly. The testimony describes the 7 Company's sales forecast, the sources of gas to satisfy 8 that sales forecast, the calculation of the cost of gas 9 rate. As I just mentioned, in support of all that, we 10 explain the gas supply and pipeline capacity prices, 11 those resulting gas costs. The testimony and exhibits 12 also support and explain the prior period 13 undercollection. And, also, my testimony describes the 14 calculation of the Local Delivery Adjustment Cost or 15 Charge. 16 Q Since the Company's filing on September 15th of Exhibit 17 1, has Northern made any corrections or revisions to 18 its proposed cost of gas for the New Hampshire 19 Division? 20 A (Ferro) Yes, it has. 21 Q You recognize this document that I have had premarked 22 as "Exhibit Northern 2" -- or, "Exhibit 2", excuse me? 23 A (Ferro) Yes, I do. 24 Q What is it? {DG 04-162} (10-19-04) 12 [Witness Panel: Ferro|DaFonte] 1 A (Ferro) That, this document, represents the Company's 2 revised proposed cost of gas for the Winter Period 3 November 2004 through 2005. 4 Q And, was Exhibit 2 prepared by you or under your direct 5 supervision and control? 6 A (Ferro) Yes, it was. 7 Q Will you describe that filing? 8 A (Ferro) Certainly. The Company, as it often times 9 does, takes a look at its cost of gas two weeks to ten 10 days prior to the hearing, and sees if it's -- if 11 there's any adjustments warranted to make a filing in 12 advance of the hearing. Of late, or of the last few 13 years, certainly the typical component of the cost of 14 gas that does need to be looked at and updated is the 15 natural gas prices. And, in fact, this filing does 16 just that, and virtually just that alone. This filing 17 is a revision to the cost of gas reflecting NYMEX 18 prices as of October 12th, 2004, published on 19 October 13th, 2004, and updates those natural gas 20 prices that we used based on a NYMEX strip in early 21 September. 22 The only other minor change into 23 this filing as compared to the last filing is that we 24 updated underground storage inventories for actuals {DG 04-162} (10-19-04) 13 [Witness Panel: Ferro|DaFonte] 1 through September. I might add that this filing, by 2 updating the natural gas prices, as I'm sure the 3 parties have anticipated, resulted in a somewhat 4 significant increase in the commodity cost of gas. As 5 this document lays out, the commodity cost in this 6 filing, compared to the initial previous filing, 7 increased by $2.4 million. However, offsetting that 8 $2.4 million commodity cost forecast increase was that 9 the Company hedges a good portion of its natural gas 10 price -- supplies, and, in fact, those are the supplies 11 that are directly affected by the natural gas prices. 12 And, so, the offset was that the gains projected in our 13 hedging schedule increased by roughly $734,000. So, 14 the net effect of increasing costs anticipated to be 15 covered by the Company's firm customers was 16 approximately $1.7 million. 17 CHAIRMAN GETZ: I'll just note that 18 we'll mark for identification as "Exhibit Number 2" the 19 October 14 filing of the revised cost of gas adjustment. 20 (The document, as described, was 21 herewith marked as Exhibit 2 for 22 identification.) 23 MS. FRENCH: Thank you, Mr. Chairman. 24 BY MS. FRENCH: {DG 04-162} (10-19-04) 14 [Witness Panel: Ferro|DaFonte] 1 Q I'd like to introduce Mr. DaFonte at this time. 2 Mr. DaFonte, would you -- 3 MS. FRENCH: I think you need to be 4 sworn. He's been sworn? 5 MR. PATNAUDE: Yes. 6 MS. FRENCH: Thank you. 7 BY MS. FRENCH: 8 Q Will you state your name and your position at the 9 company and your business address for the record? 10 A (DaFonte) Yes. My name is Francisco C. DaFonte. I am 11 the Director of Energy Supply Services for Northern 12 Utilities. My business address is 300 Friberg Parkway, 13 Westborough, Massachusetts. 14 Q And, have you testified in the past before this 15 Commission with regard to gas supply matters for 16 Northern's New Hampshire Division? 17 A (DaFonte) Yes, I have. 18 Q And, is your prefiled testimony contained in the 19 document that's been marked for identification as 20 "Exhibit 1"? 21 A (DaFonte) Yes, it is. 22 Q Would you describe that prefiled testimony, summarize 23 it for the record. 24 A (DaFonte) Yes. The prefiled testimony consists of my {DG 04-162} (10-19-04) 15 [Witness Panel: Ferro|DaFonte] 1 actual testimony, as well as some exhibits, which I 2 will describe for you. The exhibits start with an 3 Exhibit A, which consist of six pages, that details the 4 actual gas usage by gas type for each of the days for 5 the winter period and within each of the months. The 6 next exhibit, Exhibit B, basically is a summary of each 7 of the gas types that was utilized for the 2003-2004 8 winter season. Exhibit C lists the incremental city 9 gate purchases for the 2003-2004 winter season. 10 Exhibit D is a calculation of the ProGas analysis, to 11 determine the cost/benefit of that supply. Exhibit E 12 is the list of actual ProGas volumes that were 13 utilized. Exhibit F is the total usage of natural gas 14 on days of supplemental use. And, the Exhibit G is the 15 forecasted sendout for both normal, and design is 16 included on Exhibit H. And, the final Exhibit I is the 17 pricing model that the Company uses in determining the 18 discretionary hedge targets for its hedging program. 19 Q Were the testimony and exhibits that you just described 20 prepared by you or under your direct supervision and 21 control? 22 A (DaFonte) Yes, they were. 23 Q Mr. Ferro, would you identify where in the Company's 24 Exhibit 1 the Commission can find the -- actually, in {DG 04-162} (10-19-04) 16 [Witness Panel: Ferro|DaFonte] 1 Exhibit 2, the Commission can find the proposed cost of 2 gas rate for the winter period? 3 A (Ferro) Yes. Certainly. It would be the third page in 4 from that document. The first two pages are the 5 transmittal letter, and the next two pages are the 6 tariff sheets. And, it's the second tariff sheet, 7 fourth page in, labeled "Eleventh Revised Page 39" that 8 shows that the Company's proposed cost of gas for the 9 residential customers is 97.98 cents per therm. 10 Q I know you earlier described the reasons for the 11 difference between the September filing and the October 12 filing. But can you please describe for the Commission 13 how the Company's revised residential cost of gas 14 compares with the cost of gas originally proposed in 15 this per therm? 16 A (Ferro) Yes. The $1.7 million in commodity costs that 17 I previously testified to resulted in a cost of gas 18 increase from the initial filing of 4.53 cents per 19 therm. 20 Q Would you explain for the record Northern's derivation 21 of the proposed residential rate? 22 A (Ferro) Certainly. I will conveniently start off at 23 the fourth page that I turned everyone's attention, 24 Eleventh Revised Page 39, to show that the Company's {DG 04-162} (10-19-04) 17 [Witness Panel: Ferro|DaFonte] 1 forecasted volumes, firm volumes for the upcoming 2 period November 2004 to April 2005 is 38,094,890 -- I 3 stand to be corrected, 38,094,890 therms. And, that is 4 shown 80 percent down on the page on the right-hand 5 column. And, I start off there because, when one is 6 calculating a forecasted rate, the sales volumes drive 7 the entire forecast process. Because, at that point, 8 then the Company has to forecast its gas supply volumes 9 to satisfy those 38 million therms. So, I turn to the 10 previous page, which is tariff sheet Eleventh Revised 11 Page 38, and it shows the various sources of resources 12 to satisfy those 38 million therms and the rates of 13 those resources, and, as well as that, the fixed or 14 demand costs, both in terms of product demand and 15 pipeline reservation and storage demand charges. The 16 product of all those volumes and rates results in a 17 total anticipated cost of gas forecasted for the period 18 of 35,064,842. 19 In addition to those direct gas 20 costs forecasted for the upcoming period, we have 21 indirect gas costs associated with working capital, 22 associated with purchased gas costs. We have bad debt 23 expense associated with gas cost collections. And, we 24 also have miscellaneous overhead costs allocated to the {DG 04-162} (10-19-04) 18 [Witness Panel: Ferro|DaFonte] 1 winter season from the Company's last rate redesign 2 case, production and storage capacity costs, and, 3 again, allocated for the Company's last rate redesign 4 case. We have a prior period overcollection of 5 $311,393. And, we have associated interest with all 6 the prior period costs of 12,507. Resulting in total 7 anticipated indirect costs of 733,682, added to the 8 total direct cost of gas, to come up with a total 9 period cost of gas of 37,322,107. 10 When you divide the 37,322,107 by 11 the 38,094,890, you get an average cost of gas of 97.98 12 cents per therm. And, the average cost of gas becomes 13 the Company's residential gas cost rate as settled on 14 and approved by the Commission in the Company's last 15 rate redesign case. To derive the cost of gas for the 16 Commercial/Industrial High Load Factor or Low Winter 17 Customer Group and Low Load Factor or High Winter 18 Customer Group, the Company uses ratios established in 19 that rate redesign case to come up with the cost of gas 20 for the Commercial/Industrial Low Winter, again, or 21 High Load Factor class, of 70.363 cents, and the 22 average cost -- and the cost of gas for the High Winter 23 or Low Load Factor C&I class of $1.0462 per therm. 24 Q What is the impact of the Company's proposed cost of {DG 04-162} (10-19-04) 19 [Witness Panel: Ferro|DaFonte] 1 gas as compared to last winter's peak period cost of 2 gas on a typical residential customer's bill? 3 A (Ferro) To answer that question, I would like to turn 4 people's attention to the third last page of the 5 document. And, I apologize for no number on this 6 revised filing, but the third last page. That shows 7 that, in the middle column, the comparison of a 8 residential heating -- typical residential heating 9 customer's November through April bill for the prior 10 period year versus the upcoming winter period. It 11 shows that that typical residential heating customer, 12 who uses 1,250 therms a year, of which 932 therms fall 13 in the winter period, last year, with last year's cost 14 of gas and LDAC rates, paid $1,288.87 for the winter. 15 This year, reflecting the Company's revised proposed 16 cost of gas, the customer -- the typical residential 17 heating customer would pay $1,296.26. And, that's only 18 a $7.39 difference in the six month season, or roughly 19 a dollar a month. And, that relates to or that results 20 in a just over half percent increase in a typical 21 residential heating customer's bill. 22 Q Has the Company conducted any technical sessions with 23 Staff to discern whether they had concerns about the 24 filing? {DG 04-162} (10-19-04) 20 [Witness Panel: Ferro|DaFonte] 1 A (Ferro) Yes, it did. It conducted a technical session 2 at the Commission's office on October 7th, 2004. 3 Q Were any issues raised at that technical session that 4 should be heard by the Commission today? 5 A (Ferro) Yes. The Company and Staff had its -- what I 6 would like to call its "typical technical session", 7 going over generally the filing, the Company's 8 responses to the Staff data requests. And, 9 essentially, there was no issues that needed to be 10 carried forward into this hearing, other than, or at 11 least that was my opinion, other than that there was a 12 lengthy discussion on the energy efficiency programs of 13 year one versus -- not "versus", but and also going 14 forward to year two programs. And, that was about the 15 only issue at hand that we needed to resolve at this 16 time. 17 MS. FRENCH: Mr. Chairman I'd like to 18 have marked for identification "Exhibit 3". It is a 19 settlement agreement that is dated at the very bottom of the 20 second page as October 19th. And, I'd like to show this to 21 the witness. 22 CHAIRMAN GETZ: It will be so marked. 23 (The document, as described, was 24 herewith marked as Exhibit 3 for {DG 04-162} (10-19-04) 21 [Witness Panel: Ferro|DaFonte] 1 identification.) 2 BY MS. FRENCH: 3 Q Can you identify that document for the record? 4 A (Ferro) Yes, I can. That's the letter agreement 5 between the Company and Staff on issues to resolve the 6 energy efficiency program details. 7 MS. FRENCH: Mr. Chairman, I understand 8 that there is a Commission rule that requires that 9 settlement agreements, partial or whole settlement 10 agreements regarding a pending issue, need to be filed with 11 the Commission within five days of the hearing on the 12 matter. This, as you can tell by the date on this document, 13 was an agreement that was hammered out yesterday, and then 14 signed this morning. It's fairly brief. I'd like Mr. Ferro 15 to describe it for the record. And, I would ask that the 16 Commission approve this settlement as part of this filing 17 today. 18 CHAIRMAN GETZ: And, you're seeking a 19 waiver of the advance filing requirement? 20 MS. FRENCH: Seeking a waiver of the 21 advance filing requirement. Thank you. 22 BY MS. FRENCH: 23 Q Go ahead, Mr. Ferro. 24 A (Ferro) Oh, I missed the exchange. {DG 04-162} (10-19-04) 22 [Witness Panel: Ferro|DaFonte] 1 Q If you would describe the settlement terms in more 2 detail for the record. 3 A (Ferro) Certainly. The Company had a few issues to 4 resolve with Staff. And, the first one, in particular, 5 was the amount of its performance incentive that it 6 calculated for year one. The Company had calculated an 7 incentive of $28,468, and Staff's proposal was to 8 reduce that by $4,000, to $24,468 incentive, and the 9 Company has agreed to do that. And, that's the first 10 item on this letter agreement. 11 In addition to that, there were -- 12 there was an issue regarding the four new programs 13 proposed for its second year of its energy efficiency 14 programs. My understanding that these four programs 15 are designed to address what I -- what I believe a few 16 people involved refer to as "customer reluctance" to 17 entertain energy efficiency programs. And, so, we 18 needed to design these four new programs going forward 19 in year two. And, we agreed to adjust the goals in 20 that second year program related to the residential 21 conservation service program, increasing the 22 participation or the targeted anticipation -- 23 participation from 180 to 360. We also agree to 24 increase the savings for participation in the medium {DG 04-162} (10-19-04) 23 [Witness Panel: Ferro|DaFonte] 1 and large commercial/industrial customers from 23,000 2 therms to 27,300 therms. And, also, with the idea that 3 we would serve three participants in the second year 4 program. Northern also agreed to increase the measures 5 life for the Medium and Large Commercial/Industrial 6 customer's installed measures from 13 years to 14 years 7 in the second program year. Important to note that, 8 with these changes, the Staff recommends approval of 9 the Company's LDAC, the Local Delivery Adjustment Cost 10 Charge, which, as I said earlier in my testimony, a 11 component of which is the DSM Conservation Charge that 12 we're discussing here. And, finally, the parties will 13 continue to meet and discuss, during the second energy 14 efficiency program year, to address the ancillary 15 issues, you know, raised during the review of 16 Northern's Local Delivery Adjustment Charge filing. 17 Q There is one more document that's been -- I would like 18 to have premarked as "Exhibit Number 4" for 19 identification, which is a confidential filing that was 20 made on September 14th, just so that it's identified 21 for the record. Would you identify that document, and 22 it's -- and provide its relevance to this proceeding. 23 A (Ferro) Yes, I certainly recognize this document. This 24 document that is filed on September 14, 2004, {DG 04-162} (10-19-04) 24 [Witness Panel: Ferro|DaFonte] 1 coincident with the cost of gas filing, and 2 incorporated in my testimony by reference, propose -- 3 presenting the proposed supplier balancing charge, the 4 peaking service demand charge and the capacity 5 allocators associated with its unbundling structure. 6 And, what I mean by that is the charge associated -- 7 applicable to suppliers serving transportation 8 customers on Northern's system, a peaking service 9 demand charge, which is a charge associated with the 10 peaking capacity the Company releases to suppliers to 11 serve customers on our system, and the capacity 12 allocators, which is the percentages of each resource 13 that are allocated to suppliers based on each 14 customer's -- each customer's rate class that are in 15 the pools for the suppliers. 16 Q Mr. Ferro, were there any other issues raised by the 17 Staff or the OCA that you'd like to bring to the 18 Commission's attention at this time? 19 A (Ferro) Yes, there is. Last week, Staff had called the 20 Company and notified them that the office of Consumer 21 Advocate had a concern about the Company's allocation 22 of fixed costs between the two states, between New 23 Hampshire and Maine, and, therefore, arranged for a 24 call, the OCA and Staff and the Company, to discuss the {DG 04-162} (10-19-04) 25 [Witness Panel: Ferro|DaFonte] 1 matter. And, in summary, the issue is that, in the 2 advent of the competitive gas market and the 3 development of that, has brought on issues related to 4 the allocation of fixed gas costs for capacity 5 assignments between the two states, New Hampshire and 6 Maine. 7 The previously approved allocation 8 methodology of allocating fixed capacity costs and 9 fixed demand costs between the two states, that have 10 been approved many years ago by this Commission and the 11 Maine Commission, may no longer be appropriate. And, 12 so, the Company acknowledges that this is an issue that 13 we should look at a little more closely and work with 14 the Staff and the OCA, and possibly the Maine staff 15 also, to look more closely into the complex issues 16 involving this matter. And, they're complex in that at 17 least we have activity going on between the two states, 18 timing of customers going from sales to transportation 19 service and reallocation of that, that we need to look 20 into more, shortly after this proceeding concludes. 21 Q Has the Company agreed to enter into discussions with 22 OCA and Staff to resolve these issues? 23 A (Ferro) Yes, it has. 24 Q Thank you. I don't think we have anything further. Do {DG 04-162} (10-19-04) 26 [Witness Panel: Ferro|DaFonte] 1 you have anything further, Mr. Ferro? 2 A (Ferro) I do not. 3 Q Do you, Mr. DaFonte? 4 A (DaFonte) I do not. 5 MS. FRENCH: Thank you. 6 CHAIRMAN GETZ: Okay. We'll mark for 7 identification as "Exhibit 4" the confidential September 14 8 document updating Appendices A and C. 9 (The document, as described, was 10 herewith marked as Exhibit 4 for 11 identification.) 12 CHAIRMAN GETZ: And, we will move to Mr. 13 Traum. But, before you begin your questioning of the 14 witnesses, Mr. Traum, do you have a position on Exhibit 3, 15 the partial settlement? 16 MR. TRAUM: The OCA does not have an 17 objection to the settlement. I wanted to ask a couple of 18 questions to clarify things, but I don't think we are going 19 to have an objection. 20 CHAIRMAN GETZ: Okay. Thank you. 21 Please proceed. 22 CROSS-EXAMINATION 23 BY MR. TRAUM: 24 Q I'm going to address my questions to the panel, but {DG 04-162} (10-19-04) 27 [Witness Panel: Ferro|DaFonte] 1 whomever feels more comfortable to answer, please do. 2 But I expect that most of them to be Mr. Ferro. 3 Starting with the last issue, the capacity costs, would 4 a fair way to summarize the concern that, certainly, 5 the OCA raised was that, for a customer migrating from 6 sales to transportation, in New Hampshire, there is 7 capacity assignment and in Maine there is not? 8 A (Ferro) That's correct. 9 Q Okay. So that could result in a difference, in terms 10 of the -- let's call it the "stranded costs" that 11 relate to capacity assignment or non-capacity 12 assignment, and who ends up picking up those costs? 13 A (Ferro) Again, I will just say that the development of 14 the gas on gas competitive market has created some 15 nuances, has created some issues that we have to look 16 into, to come up with, hopefully, a fair and 17 appropriate allocation methodology of fixed costs. 18 Q Fair enough. Thank you. On Exhibit 3, I'd just like 19 to walk through it briefly. With the parties' 20 agreement on Item 1, the performance incentive, the 21 $4,000 reduction, that performance incentive relates 22 strictly to C&I programs? If you know? 23 A (Ferro) No, that $4,000 is related to both residential 24 and C&I programs. {DG 04-162} (10-19-04) 28 [Witness Panel: Ferro|DaFonte] 1 Q So, the -- But the incentive earned from each 2 classification, whether it's residential or a C&I, is 3 recovered strictly from that particular classification? 4 A (Ferro) Yes. 5 Q And, moving onto the second point, the four new 6 programs proposed. Were those programs actually 7 discussed in some detail during the summer? I mean, 8 they didn't just pop up as a result of the technical 9 session? 10 A (Ferro) Yes. It's my understanding that the generic or 11 overall group for the energy efficiency programs in New 12 Hampshire, under docket DG 02-106, have been certainly 13 discussed prior to this proceeding. And, as you 14 suggest, in a time frame during the summer, spring and 15 summer, the details of these programs and all the other 16 programs that are involved in each Company's year -- 17 program year one and program year two. 18 Q So, this document is just being used as the vehicle to 19 get Commission approval for the Company to implement 20 these new programs? 21 A (Ferro) That is correct, in that this -- for Staff and 22 the Company to move forward, this is the proceeding 23 that we're looking to approve the incentive that 24 affects the LDAC rate. And, it's my understanding it's {DG 04-162} (10-19-04) 29 [Witness Panel: Ferro|DaFonte] 1 also the proceeding that will provide approval, 2 establishment and approval of the structure of the four 3 new programs. 4 Q Okay. And, it's -- that structure was basically what 5 had been agreed to during the summer among all of the 6 parties in the generic DSM docket? 7 A (Ferro) Yes. 8 Q With regards to Exhibit 2 you updated the NYMEX prices. 9 And, recognizing that, you know, that resulted in a 10 significant increase, I'm just wondering if, where 11 almost a week has passed now, have prices on the NYMEX 12 changed significantly that a further update is even 13 appropriate at this point? 14 A (Ferro) Yes, I personally have not checked the NYMEX 15 strip of late. But I will say what I'm afraid I say 16 just about at every proceeding, and that is this 17 Commission has a very effective process in place of 18 keeping up with changing gas prices by way of allowing 19 the Company to expeditiously change its rate each 20 month, filing five business days prior to the beginning 21 of the next month, to show, in fact, gas costs have 22 changed up or down, would impact the updated projected 23 end of period under-/overcollection that we can just -- 24 we can change the rate at that time without a formal {DG 04-162} (10-19-04) 30 [Witness Panel: Ferro|DaFonte] 1 proceeding. And, so, I will say that, certainly, it's 2 best to try to start off on the -- at a rate on 3 November 1 that best reflects our anticipated cost of 4 gas. But, on the other hand, I suggest that to change 5 the rate a day or two before the hearing or at the 6 hearing, after filing a revision a week before, is not 7 all that necessary or efficient. 8 Q I believe you indicated that, as far as the typical 9 customer bill is concerned, their total bill this 10 winter, at least starting out, is slightly below what 11 it was last winter? 12 A (Ferro) Yes. And, I wanted -- I'd like to add that New 13 Hampshire customers are not seeing the increases that 14 we've seen published of late or the increases that 15 other utilities seem to be implementing on November 1. 16 So, I was pleasantly surprised, i.e., pleased, that 17 even with this increase New Hampshire customers, 18 starting off November 1, are looking at a very minimal 19 rate increase -- bill increase of point 0.57 percent. 20 Q I'm also pleased that it's a minimal change. But isn't 21 a lot of it due to the status of the undercollection of 22 last winter versus an overcollection coming into this 23 winter? 24 A (Ferro) It has something to do with that. I would turn {DG 04-162} (10-19-04) 31 [Witness Panel: Ferro|DaFonte] 1 to -- turn to a page in Exhibit 2 that is, again, I 2 apologize for not being numbered, but it's the fifth 3 page from the last. And, what you're asking, Mr. 4 Traum, is the comparison of the rate. And, it shows 5 that, as you said, you know, 9.2 cents, and I'm looking 6 at the last column on the right, 9.2 cents reduction to 7 the rate this year attributable to the prior period 8 under-/overcollection? I'm sorry, yes. But there is 9 other things going on that I might add that, you know, 10 helps keep the rate down. And, the one that comes 11 particularly in mind to me is the hedging, both the 12 financial hedging that Mr. DaFonte has implemented for 13 Northern Utilities, Maine and New Hampshire, as well as 14 the physical hedging that goes on with storage, that 15 somewhat insulates us from volatile, sudden gas price 16 increases in the upcoming winter. 17 Q You mentioned about storage, and I had a question I'd 18 like to get educated on. With regards to underground 19 storage, I'll assume that the Company basically has 20 their storage full when they enter the winter period? 21 A (DaFonte) Yes, that's correct. We try to get to 22 approximately 95 percent full by November 1st, which 23 allows us some flexibility, in the event we have some 24 warm weather in November and have to inject. But, {DG 04-162} (10-19-04) 32 [Witness Panel: Ferro|DaFonte] 1 typically, we strive for 95 percent full. 2 Q Now, as the winter proceeds, do you follow some kind of 3 a rule curve, in terms of how much, what percentage of 4 storage you should still be maintaining at different 5 points during the winter? 6 A (DaFonte) Yes, we do. Each month we have a targeted 7 inventory level and we try to adhere to that target as 8 closely as possible. 9 Q Is that more or less standard operating procedure in 10 the industry? 11 A (DaFonte) I would say that, from my experience, it is 12 very much utilized across the industry. 13 Q And, is there a rule curve for the Northeast or each 14 company does it based on their own situation? 15 A (DaFonte) Each company would have its own unique rule 16 curve, which is based on the, first of all, the amount 17 of storage that they have, and, obviously, the load 18 factor of their customers. 19 Q And, as far as Northern's concern, the rule curve 20 you're adhering to now is the same rule curve you 21 adhered to last year? 22 A (DaFonte) Yes. There's very little change, if any at 23 all. 24 Q I think I only have one other question, and it relates {DG 04-162} (10-19-04) 33 [Witness Panel: Ferro|DaFonte] 1 to Page 7 of Mr. Ferro's testimony. You had mentioned 2 that the -- I guess the Company's making a change now, 3 and they will be shutting off the interruptible 4 customers' meters. And, I'm just wondering what caused 5 you to take that step that it hasn't been doing in the 6 past? 7 A (Ferro) Yes. The Company has decided to, as you state, 8 to shut off interruptible sales customers' meters on 9 approximately December 1, and not turn them back on 10 until approximately April 1st of next year. And, I 11 might add, when I say "the Company", that is Northern 12 Utilities, Maine and New Hampshire and Bay State Gas, 13 Massachusetts. This is in response to the, number one, 14 the extreme cold spells we had in January of last year. 15 And, that even though we tell interruptible sales 16 customers "the season is closed and you cannot use 17 until further notice", they, upon an emergency, they 18 can just turn the gas on. And, it's very much 19 secondarily a price issue. It's very much primary a 20 reliability issue. And, the Company can ill afford to 21 lose that control of its system, in the event that 22 interruptible customers may be compelled or need to use 23 natural gas on a critical day, and we put at risk the 24 service of our firm customers. And, so, the Company {DG 04-162} (10-19-04) 34 [Witness Panel: Ferro|DaFonte] 1 has decided to implement this process of shutting the 2 meters off. And, as you -- I assume you know, the 3 Company provides the service on a "best effort" basis, 4 has obviously the right to turn these customers off, 5 and, in fact, has the obligation not to plan for 6 interruptible customers. We plan for firm customers. 7 And, so, if those customers are hooked up to our system 8 and could draw from our system, then it imposes 9 essentially a planning requirement that is not our 10 requirement. And, so, we have decided to shut meters 11 off on December 1. 12 Q Last January, did any of those customers take service? 13 A (Ferro) I'm sorry? 14 Q Last January, during a critical cold period, did any of 15 those interruptible customers take gas? Unauthorized 16 gas? 17 A (Ferro) Yes. Even though I, excuse me for saying this, 18 that is somewhat irrelevant to the concern. I believe 19 at least one, and maybe two, New Hampshire customers 20 did use gas in January. I'm sorry, I can't recall if 21 it's one or two. I provided that information to Staff. 22 But there was at least one, and maybe two. 23 Q And, did that risk the reliability of the system? 24 A (Ferro) Again, the potential of, you know, several {DG 04-162} (10-19-04) 35 [Witness Panel: Ferro|DaFonte] 1 interruptible customers using on a critical day could 2 upset the delivery of firm service supplies to our 3 customers. Did that upset the system? No, it did not. 4 Q From a financial point of view, did those customers pay 5 for this additional cost imposed on the system? 6 A (Ferro) Yes, but that is another matter. First of all, 7 as I said, cost is a second issue. But, with respect 8 to cost, the individual customer contracts, and there's 9 at least a legal question as to our right to be able to 10 charge them an amount that really does satisfy the 11 potential cost of the gas that they're taking on our 12 system. So, we did charge them a price that I strongly 13 feel did cover the cost. But there is some legal 14 exposure here that even that price that we charged 15 could be challenged, and then that would create 16 potential cost shifting. But that is a moot issue when 17 now they cannot even pull off our system. 18 MR. TRAUM: Thank you. That's all I 19 have. 20 WITNESS DaFONTE: Could I just add to 21 that, if I may? 22 MR. TRAUM: Certainly. 23 BY THE WITNESS: 24 A (DaFonte) I just want to make sure that everyone {DG 04-162} (10-19-04) 36 [Witness Panel: Ferro|DaFonte] 1 understands that it's not an isolated issue in terms of 2 this past January. That a lot of these customers have 3 been doing this for a number of years. There are 4 situations that require a customer, because of an 5 emergency situation, to take gas from our system. And, 6 in some cases, it's at times when it's a critical day 7 and other times it's not. The fact is that it's been a 8 consistent pattern and we wanted to make sure that we 9 put remedies in place to, again, not put undue risk on 10 our system. And, that's -- that's really the major 11 issue. 12 Another issue that I would bring up 13 is that, although we didn't see any adverse impact from 14 any of these customers taking gas last year, the fact 15 is that, on our peak day last year, we did have a lot 16 of school systems and other businesses that had shut 17 down. And, so, that certainly benefited our 18 distribution system. Obviously, that can't be counted 19 on from year to year. But we certainly want to avoid 20 these situations in the future. 21 MR. TRAUM: Thank you. 22 CHAIRMAN GETZ: Mr. Damon, are you going 23 to follow up on this issue? 24 MR. DAMON: I had one question, and you {DG 04-162} (10-19-04) 37 [Witness Panel: Ferro|DaFonte] 1 may have more, but -- 2 CHAIRMAN GETZ: Well, it's just, it 3 seems to me that it may be moot prospectively, and it may 4 have been moot in the past year, because a number of other 5 customers were down. But it seems there's at least a couple 6 of legal theories in play here. Whether it was a mere 7 breach of contract or, in fact, a theft of services by these 8 customers to turn on the gas, when they conceivably had no 9 right to do so? But I just want to maybe hear from counsel 10 at the end of what ongoing efforts are underway to deal with 11 these customers. And, I appreciate your point that, if you 12 do, in fact, turn it off, so that they can't be -- this 13 can't happen again, there is still this outlying issue of 14 these past actions by customers. 15 MS. FRENCH: Mr. Chairman, I think that, 16 in terms of the tariff provisions, Mr. Ferro can address the 17 emergency use provisions in the contract, which, you know, 18 make it, as he indicated before, in terms of price, it's 19 gray, in terms of usage it's also gray. I mean, there are 20 emergency use provisions in the agreements, as I understand 21 it, and there are price penalties for unauthorized use, 22 rather than I think a deemed theft of services. I think 23 that's what you will find when you see the contracts. Can 24 we let Mr. Ferro address that as best as he's able? Would {DG 04-162} (10-19-04) 38 [Witness Panel: Ferro|DaFonte] 1 you like to hear? 2 CHAIRMAN GETZ: Yes, why don't you 3 follow up, since we're at this point. 4 MS. FRENCH: Okay. 5 BY THE WITNESS: 6 A (Ferro) Certainly. We need to revise the contracts for 7 a couple of reasons. One is, as you asked, the charge 8 for unauthorized use. The charge for unauthorized use 9 by way of our tariff in our delivery service terms and 10 conditions, is that, on a day that a customer uses gas 11 above a tolerance bandwidth, and typically on a 12 critical day it's two percent, the transporting 13 customer gets charged five times that daily index 14 price. And, that's what we look to charge the 15 interruptible customer, if, in fact, he used on a 16 critical day. We're just talking costs now, we're 17 putting aside the reliability issue. And, so, we would 18 -- we will tie the -- revise the contract to tie it 19 more closely to our terms and conditions and eliminate 20 the unauthorized use charge that's stated in the 21 contract, because I believe, in most contracts, if not 22 all, is $15 per MMBtu. So, if one looked at the 23 contract, one would say "gee, the Company is only 24 entitled to charge $15 for unauthorized use." That {DG 04-162} (10-19-04) 39 [Witness Panel: Ferro|DaFonte] 1 needs to be changed. The second change in the service 2 that we plan on proposing is that we should really 3 unbundle the service, and "unbundle the service" 4 meaning we'll offer them interruptible transportation 5 service and interruptible gas supply service. And, 6 that also more closely ties the service to the delivery 7 service transportation, delivery service -- delivery 8 service terms and conditions. So that the customer 9 can, you know, take transportation service from us and 10 then can buy gas on an interruptible basis from a 11 supplier or buy gas from Mr. DaFonte, and on an 12 interruptible basis. The resulting two components of 13 the charge would still be what we really charge today, 14 a bundled interruptible sales price, based on value of 15 service, i.e., their alternate fuel price. 16 So, those are the two tariff 17 charges that we plan on filing or proposing with the 18 Commission. Again, I'm repeating myself, but, 19 certainly, if we ensure that customers can't pull off 20 our system, the cost shifting or the insufficient 21 charge by way of contract goes away anyways. I hope 22 that answers your question. 23 CHAIRMAN GETZ: Oh. And, just one 24 follow-up, though. {DG 04-162} (10-19-04) 40 [Witness Panel: Ferro|DaFonte] 1 BY CHAIRMAN GETZ: 2 Q When you used the terms "emergency use" and 3 "unauthorized use", were you using those -- are those 4 two separate things? 5 A (Ferro) Those are two separate issues. In the past, we 6 have allowed customers to call us up and say "I have an 7 emergency. I've run out of my oil supply or my oil 8 burner has crapped out on me." Excuse me. "And, I 9 need a supply." And, we would say "Okay, let's check. 10 We have enough supply we have distribution capacity. 11 Go ahead and use." And, they would use. And, then, we 12 would tell them, when they would have to -- "let us 13 know when your emergency is over, call us up and, you 14 know, let us know you're going to be shutting off." 15 And, that's emergency sales, and we would charge them 16 an appropriate rate that did cover our marginal cost, 17 plus. Ironically, an "unauthorized use" charge, they 18 don't call us up, they just use gas. They're not even 19 getting charged as much as emergency sales use rate by 20 way of the contract, or we wouldn't -- by way of the 21 contract, wouldn't be charging even as much. But it's 22 an interesting issue. The emergency sales issue is 23 also what concerned our interruptible customers. They 24 said "well, jeez, if you shut me off, I don't have any {DG 04-162} (10-19-04) 41 [Witness Panel: Ferro|DaFonte] 1 emergency sales available." And, we said "That's 2 right. However, we would do the best we can to go out 3 there, turn your meter back on, and have you use, in a 4 very temporary state, and would come back out and shut 5 your meter off within 24 hours, 48 hours, whatever, 60 6 hours." And, that was problematic to some of the 7 customers, because they could ill afford to wait for 8 the Company to come out and turn the meter on. Well, 9 that suggests to us they shouldn't be on interruptible 10 service. They should be on firm service, if, in fact, 11 they need virtually instantaneous service 365 days a 12 year. And, so, the more we discuss this issue, the 13 more, you know, we have to make sure they understand 14 the service they're bargaining for, it's interruptible 15 service. 16 So, emergency sales service is 17 still available, in that the Company does try to work 18 with the customers and would go out and turn their 19 meter on at a cost, and charge them appropriately for 20 their gas use, and turn their meter off when we have to 21 turn it off. And, so, that is available. But I 22 suspect that that still is not sufficient for some of 23 the customers that are taking interruptible service. 24 But it is two different concepts. "Emergency sales {DG 04-162} (10-19-04) 42 [Witness Panel: Ferro|DaFonte] 1 service" is taking service during a curtailment period 2 upon permission from the Company. While "unauthorized 3 use" is, with no permission, they just used gas. 4 CHAIRMAN GETZ: Thank you. Mr. Damon. 5 MR. DAMON: Yes. Just a couple 6 follow-ups. 7 BY MR. DAMON: 8 Q I take it then that the Company would first come to the 9 Commission for approval of these tariff charges that 10 you described before, seeking to amend the individual 11 interruptible use contracts? 12 A (Ferro) We would certainly be required to do so, and 13 thus we certainly will. 14 Q What are the Company's plans for filing for those 15 tariff changes? 16 A (Ferro) The Company has filed letters to these 17 interruptible sales customers, a copy of which I 18 provided to Staff. And, we have suggested to them "we 19 will be contacting you during this curtailment period 20 and letting you know about other changes to your 21 service." And, those other changes will be revised 22 contracts that we would suggest, if they want 23 interruptible service to enter into, once they enter 24 into them, we would be filing them with the Commission. {DG 04-162} (10-19-04) 43 [Witness Panel: Ferro|DaFonte] 1 And, those contracts would need to be filed and provide 2 enough time for the Commission to approve, so that we'd 3 like at least to go into effect early in or beginning 4 with the next interruptible season in April. So, we do 5 plan on addressing this issue with the Commission 6 during this winter period. 7 Q Thank you. I'll move on then. Mr. Ferro, I'll address 8 these next questions to you, Mr. Ferro. But, if 9 Mr. DaFonte has the information that is needed, I'd 10 appreciate if he'd speak up. How often does the 11 Company verify that customers in the Low Winter Usage 12 classes qualify for the reduced cost of gas rate? 13 A (Ferro) Can you repeat the question please? 14 Q Sure. How often does the Company verify that customers 15 in the Low Winter Usage classes qualify for the reduced 16 cost of gas rate? 17 A (Ferro) I think that, to answer your question, is to 18 address how often do we check and make sure that our 19 customers are on the right rate class. And, if they're 20 on the right rate class, then they would get the 21 appropriate cost of gas rate. The answer to that 22 question is that the Company does an annual load test, 23 12 months ending August I believe of every year, August 24 to September, and runs the load test through for every {DG 04-162} (10-19-04) 44 [Witness Panel: Ferro|DaFonte] 1 customer. And, if the customer's annual use -- we 2 check the customer's annual use and we check their 3 winter use as a percent of annual use. And, if they 4 fall into the criteria of Low Winter or High Winter, 5 then they either stay in the right class they had been 6 in, or they get reclassified to the right class and get 7 notified that they will be reclassified. The short 8 answer to your question is once a year we run a load 9 analysis test to confirm that they're on the right 10 class or to switch them to the right class. 11 Q Okay. When is that test typically performed? 12 A (Ferro) It's run either 12 months ending August or 13 September, forgive me for not knowing that 12 month 14 period. But right after it's run there is a bill 15 message to these customers who will be reclassified in 16 that month. So, it's -- I believe it's 12 months 17 ending August, you know, their September bill they're 18 notified of what class they will be in. It could be 12 19 months ending September, and October they are, then 20 November 1 of every year customers are put on their 21 correct class. 22 Q Thank you. Mr. Ferro, did the Commission's Audit Staff 23 review Northern's 2003-2004 cost of gas environmental 24 and energy efficiency costs? {DG 04-162} (10-19-04) 45 [Witness Panel: Ferro|DaFonte] 1 A (Ferro) They certainly did. 2 Q Are you aware of the results of those audits? 3 A (Ferro) Yes, I am. 4 Q And, would you summarize those? 5 A (Ferro) After resolving a few issues, i.e., the Company 6 needed to provide some -- a few missing invoices and a 7 transfer of one particular small charge, the final 8 analysis is that the Company's environmental response 9 costs recorded on the Company's books and reflected in 10 its charge, and the Company's demand-side management 11 conservation costs reflected on its books, and also 12 reflected in the Conservation Charge, have been 13 confirmed and approved. 14 Q Another question for Mr. Ferro. Can you describe how 15 the Company's hedging activities to date has impacted 16 the cost of gas rate calculation included in this 17 filing? And, you may have actually already answered 18 this, and, if you have, then just say that. 19 A (Ferro) I believe I have. I didn't actually do the 20 math. But, as I testified to, 4.53 cents increase this 21 -- from the September 15 filing to the October 14 22 filing, without the hedging program in place, there 23 would have been another $700,000 reflected in the 24 revised rate, and that would probably be another two {DG 04-162} (10-19-04) 46 [Witness Panel: Ferro|DaFonte] 1 and a half cents. So that had -- that was the effect 2 of the change in our proposed rate. But, if one took 3 the $1 million that is a gain in the entire filing, I 4 would just do the math, and I will pause here to do it, 5 if you don't mind. If I take $1 million divided by our 6 38 million therms approximately, that's 2.6 cents of a 7 -- avoiding a higher cost of gas rate by 2.6 cents. 8 Q Going back to the interruptible customer situation, has 9 there been any feedback from the Company's 10 interruptible customers about the change in the new 11 winter curtailment policy? 12 A (Ferro) Yes. As I touched upon it, but didn't go into 13 too much detail, don't panic, I won't give too much 14 detail here, but the customers called back throughout 15 our three states, by the way, and their number one 16 concern, as I indicated, was no emergency sales service 17 available. Another concern was that some of them had a 18 natural gas fueled pilot light available at all times 19 to heat up their Number 6 oil. They said "well, if you 20 shut me off, I don't have that pilot light available." 21 And, of course, the pilot light should be on firm 22 service or they should have some other means of heating 23 up their Number 6 oil. And, another issue, and I 24 believe we do have a hospital in New Hampshire on {DG 04-162} (10-19-04) 47 [Witness Panel: Ferro|DaFonte] 1 interruptible service, but it might be of interest to 2 the parties here anyway of this issue, and that is the 3 hospitals called up and said, both in Massachusetts, 4 Maine, and I believe in New Hampshire, and said "I need 5 the redundancy of fuel. I need a second fuel 6 available. And, it's not good enough to call you up 7 and you come out, you know, within 8 hours or 24 hours 8 to turn you on -- turn us on." And, again, "we're 9 sorry, but you sound like you need firm service, not 10 interruptible service, if you need two fuels available 11 365 days a year." And, in fact, we have customers on 12 our system so-called "playing by the right rules", that 13 is they're on firm service, if they need that type of 14 service, hospitals, other centers, youth centers, 15 etcetera, nursing homes, they're on firm service, or 16 they have another package of energy equipment that 17 enables them to be backed up. But, if they need 365 18 day firm backup from us, they're on the wrong service, 19 interruptible service. So, that's the feedback we got. 20 And, quite frankly, they understood it all, even though 21 they didn't like to hear it, they understood it. And, 22 so, they -- the customers, in general, are assessing 23 what their options are. Whether they -- Whether it's 24 repiping their fuel -- their pilot light, whether it is {DG 04-162} (10-19-04) 48 [Witness Panel: Ferro|DaFonte] 1 going to firm service, or whether it is having the 2 Number 2 oil heating up their Number 6 oil. Either 3 way, the burden is on them, to some extent, to get to 4 have their facilities set up in the appropriate manner. 5 That all said, the Company at all 6 times has said "We are willing to work with you, we'll 7 be flexible. Obviously, we will not put at risk 8 service to our firm customers, compromise our firm 9 distribution system. But we will work as best we can 10 with you." We're not going to leave them out in the 11 cold, so to speak. That is generally the feedback. 12 Q Mr. Ferro, how does the Company's sales forecast 13 compare to last year's results? And, the sales 14 forecast I'm talk about is obviously this coming 15 winter. 16 A (Ferro) Right. The Company's sales forecast this year 17 reflects a 1 percent increase over whether or not -- 18 weather normalized sales of last year, that 1 percent 19 represents the annual average growth rate for the 20 Company in its five year forecast plan. 21 Q Does the Company anticipate any significant new growth 22 in the year 2005? 23 A (Ferro) The Company anticipates, as I said, a 1 percent 24 average growth rate over the next five years. That's {DG 04-162} (10-19-04) 49 [Witness Panel: Ferro|DaFonte] 1 not to suggest specifically that it is anticipating 2 exactly a 1 percent increase next year over last year, 3 but anticipates averaging a 1 percent growth rate over 4 the next several years. 5 Q But I take it the Company has no reason to suppose that 6 2005 will be an exception to those growth rates that 7 you just testified about? 8 A (Ferro) That's right. It does not, although I do want 9 to add that the Company is focussed on trying to 10 stimulate natural gas use on our system. Maybe a 11 little bit more so than the last few years. Whether 12 that yields a greater growth rate is yet to be seen. 13 But, certainly, the Company hopes to stimulate natural 14 gas use behind its system. 15 Q Would you please explain the improved results in 16 unaccounted for losses in this year's forecast? 17 A (Ferro) I'm sorry, could you repeat the question. 18 Q Would you please explain the improved results in 19 unaccounted for losses included in this year's 20 forecast? 21 A (Ferro) Yes. The Company has noticed declining losses, 22 unaccounted for, if you will, percentages on its system 23 over the last few years. I think two issues, two 24 matters here. One is, of course, that I like to think {DG 04-162} (10-19-04) 50 [Witness Panel: Ferro|DaFonte] 1 that we maintain the system very efficiently. You 2 know, we've had the Bare Steel Replacement Program in 3 place throughout the '90s in the State of New 4 Hampshire, and we continue to maintain our system. 5 And, the second thing is that I believe we are more 6 adept and avid of accounting for what is going on in 7 our system. So, I think we're nailing down on a 8 monthly basis the true lost and unaccounted for gas on 9 the system. So, I think we're -- at least currently 10 we're seeing that this is showing a very reasonable -- 11 reasonably low percent unaccounted for on the system. 12 Q Does the ITRON metering system play a part in that? 13 A (Ferro) That's a good question. I would be only 14 surmising, if you will, to say that, but I think that's 15 a good chance, a good possibility, that the automatic 16 meter reading on a monthly basis, the radio-based ITRON 17 system, certainly eliminates estimated readings. And, 18 so, more accurately records the actual use by customers 19 each month. And, in fact, hopefully allows us to just 20 better monitor customer's use, metered use, and that's 21 certainly can only help. 22 Q Is the Company still experiencing migration from the 23 bundled sales commercial and industrial classes to 24 unbundled transportation classes? {DG 04-162} (10-19-04) 51 [Witness Panel: Ferro|DaFonte] 1 A (Ferro) We certainly do. I have not -- I do not have 2 with me the last report that we filed with the Staff, 3 which shows the numbers of customers in volumes 4 associated with non-grandfathered transportation 5 customers and grandfathered transportation customers. 6 But we certainly should expect to see some movement of 7 migration, and some reverse migration also, "reverse 8 migration" being customers going from transportation 9 service back to sales service, on an ongoing basis. 10 Q In terms of the migration from sales service to 11 unbundled transportation class, with respect to the 12 commercial/industrial classes, what is the impact on 13 the cost of gas calculation? 14 A (Ferro) The impact on the cost of gas from sales 15 customers migrating to transportation service, which 16 would be on a non-grandfathered basis, is an impact of 17 virtually nothing. Virtually zero. That is 18 non-grandfathered customers are assigned to our fixed 19 capacity costs and certainly should not affect our 20 commodity costs, because they're not buying gas from 21 us. 22 Q Okay. Just two more areas of inquiry for you, 23 Mr. Ferro, and this regards the energy efficiency 24 issues. The Settlement Agreement approved by the {DG 04-162} (10-19-04) 52 [Witness Panel: Ferro|DaFonte] 1 Commission in DG 02-106 includes a template, which is 2 so-called "Schedule G", to measure the Company's 3 performance on its energy efficiency programs. Has 4 Northern provided this template for Program Year 2 5 energy efficiency programs? 6 A (Ferro) The Company has not yet prepared that schedule. 7 Certainly plans on doing so. 8 MR. DAMON: Staff would like to make a 9 record request for receipt of that information. 10 CHAIRMAN GETZ: We will reserve Exhibit 11 Number 5 -- 12 MS. BATEMAN: Five. 13 CHAIRMAN GETZ: -- for that record 14 request. 15 (Exhibit 5 reserved) 16 MS. BATEMAN: And, what was that 17 request? 18 MR. DAMON: The request for the template 19 for Program Year 2 energy efficiency programs. 20 BY MR. DAMON: 21 Q Also, the Settlement Agreement requires the Commission 22 to approve any changes to the preapproved energy 23 efficiency budgets that are greater than 20 percent. 24 As I understand it, on June 15, 2004, the Commission {DG 04-162} (10-19-04) 53 [Witness Panel: Ferro|DaFonte] 1 scheduled a technical session to address reductions to 2 Northern's Program Year 2 energy efficiency budget that 3 were greater than the 20 percent. Could you explain, 4 as a result of that technical session, what is the 5 Company budgeting for Program Year 2 expenditures? 6 A (Ferro) Certainly. As a result of the activity you 7 mentioned, the Company had come up with a Year 2 8 Program budget of $639,000. And, as we discussed, at 9 least I mentioned earlier in my testimony, at the 10 October 7 technical session we had discussed 11 demand-side management programs, and essentially 12 reaffirmed that the $639,000 budget was appropriate. 13 Q Thank you. Mr. DaFonte, could I ask you some questions 14 now? 15 A (DaFonte) Absolutely. 16 Q Are there any significant changes to the supply 17 portfolio when you did this winter compared to last 18 winter? 19 CHAIRMAN GETZ: Could I have a moment, 20 Mr. Damon. Do you have many questions for this witness? 21 MR. DAMON: I have about six. 22 CHAIRMAN GETZ: About six. Okay. I 23 have a meeting at 12:30 that I need to be on time for. So, 24 it looks like we won't get this done in order for me to get {DG 04-162} (10-19-04) 54 [Witness Panel: Ferro|DaFonte] 1 to that meeting. So, let's -- why don't we break now and 2 resume at -- I should be back by 1:00 . 3 MR. DAMON: Okay. 4 CHAIRMAN GETZ: Okay. We'll take the 5 lunch recess. Thank you. 6 (Hearing recessed at 12:00 p.m. and 7 reconvened at 1:12 p.m.) 8 CHAIRMAN GETZ: We're back on the 9 record. And, Mr. Damon, I believe you had some questions 10 for the witness. 11 MR. DAMON: Yes. Thank you. 12 BY MR. DAMON: 13 Q Mr. DaFonte, I think the last question I had asked that 14 I'm not sure you had gotten too far into your answer 15 was whether there was any significant changes in the 16 supply portfolio going into this winter period, 17 compared to last winter? 18 A (DaFonte) The only change to the supply portfolio this 19 winter compared to last winter would be the increase in 20 the Duke Energy peaking contract from 18,400 decatherms 21 per day to 24,000 decatherms per day, and that is per 22 the terms of the contract with Duke Energy. 23 Q Could you briefly describe the supply developments in 24 the Northeast that have occurred in the recent past, {DG 04-162} (10-19-04) 55 [Witness Panel: Ferro|DaFonte] 1 with particular attention to what's going on at Sable 2 Island and the LNG projects in Canada? 3 A (DaFonte) Sure. Basically, what we've seen is that the 4 anticipated development of incremental supplies from 5 Sable Island have not materialized. Those supplies 6 were initially intended to increase to about one Bcf 7 per day from a half a Bcf per day that exists today. 8 And, that has not materialized. And, in fact, what 9 they have come up with is a lot of dry wells as they 10 have been drilling offshore. And, what that's done is 11 it's made it very difficult, in some instances, to get 12 supply off of the Maritimes pipeline. And, what that 13 has done now is it's forced the development of LNG 14 projects. There's approximately three LNG projects 15 being proposed in the Maritimes provinces. And, those 16 LNG projects are designed to bring in liquid cargo and 17 then vaporize into the Maritimes pipeline. And, 18 essentially, that will replace the volumes that were 19 anticipated to come on line from Sable Island. And, 20 that is -- the new supply is anticipated to come on 21 line sometime in the 2009, 2010 time frame. 22 What the Company has found is that, 23 through its RFP process that it conducted for the 24 supplies for this winter period, we asked bidders to {DG 04-162} (10-19-04) 56 [Witness Panel: Ferro|DaFonte] 1 offer up supply bids for this coming winter at several 2 locations in the Northeast marketplace. One was the 3 Algonquin city gate and other was East Hereford, which 4 is the interconnect between PNGTS and TQM. And, then, 5 the other was a supply in Dracut. And, what we found 6 is we only had one bid for supply in East Hereford, and 7 we had two bids for supply in Dracut, and one bid for 8 supply on Algonquin city gate. And, what that tells me 9 is that there is a lack of supply out there, that the 10 market is going to be very tight this winter. And, we 11 saw some of that last winter, in January, when I 12 believe on the peak day we only saw about 50,000 13 decatherms trading hands on Algonquin. So, it is a 14 concern, I think, however I think Northern Utilities is 15 in a good position at this point because of its 16 contractual commitments that it has in place. And, I 17 don't see any issues necessarily affecting Northern at 18 this time. But we'll certainly keep monitoring these 19 new projects as they develop and we anticipate that at 20 some point we'll be discussing the projects with Staff. 21 Q What were the results of that RFP process? Did the 22 Company enter into any new agreements or contracts? 23 A (DaFonte) Northern Utilities did not. Bay State Gas 24 Company did. But Northern Utilities' supply is pretty {DG 04-162} (10-19-04) 57 [Witness Panel: Ferro|DaFonte] 1 much locked up through either storage or the peaking 2 contracts that I had spoke of earlier with Duke Energy. 3 Q What is the proposed supply of LNG for the three 4 projects in Maritimes that you described? 5 A (DaFonte) Generally, those projects would get their LNG 6 from points in the Middle East, Qatar is one that is 7 very much a -- sort of a hub of LNG use, and others, 8 other supply points would probably be, well, cargo from 9 Australia, as well as Trinidad and Tobago. 10 Q Would you please describe the methods the Company uses 11 to mitigate price volatility in this cost of gas 12 filing, the forecasted cost of gas filing? 13 A (DaFonte) Yes. The Company has a hedging mechanism 14 that it's put in place for the last three years, 15 whereby it essentially uses a dollar cost averaging 16 methodology to lock in the NYMEX futures prices. The 17 Company worked with Staff to develop a program that we 18 felt was flexible enough to mitigate price volatility, 19 and, certainly, simple enough to manage and to 20 understand. We also, as part of that program, have 21 discretionary targets that we calculate semi-annually 22 prior to the or in conjunction with the winter CGF 23 filing or the COG filing and the summer COG filing. 24 Q Are there any other methods, other than those, to {DG 04-162} (10-19-04) 58 [Witness Panel: Ferro|DaFonte] 1 accomplish the objectives of hedging? 2 A (DaFonte) Sure. There are multiple methods that you 3 could use. You could use options as well. Options 4 carry a premium with them, whereas simple futures 5 contracts though have a very limited cost, obviously, 6 less than half a penny per decatherm is the cost. 7 Whereas, options, especially in a very volatile 8 marketplace, are going to command a significant 9 premium. 10 Q Does the Company use physical hedges? And, if so, what 11 kind? 12 A (DaFonte) Yes. The Company has approximately 13 55 percent of its requirements met through underground 14 storage and about another 10 percent is met through 15 LNG, either on-system or via contracts with Distrigas. 16 Q Why do you count the 10 percent of the LNG contracts as 17 a physical hedge? 18 A (DaFonte) Those are -- it's a physical hedge because 19 the price is known prior to the winter period. And, 20 so, we consider that a physical hedge. Very similar to 21 underground storage, where the price is known going 22 into the winter period. 23 Q Finally, does the Company continue to use winter base 24 load contracts as a component of its supply portfolio? {DG 04-162} (10-19-04) 59 [Witness Panel: Ferro|DaFonte] 1 A (DaFonte) Yes, it does. For the base load requirements 2 that we'll enter into, base load contracts, and, 3 typically, we increase the base load amount during the 4 colder months of December through February. 5 Q And, do you have a ballpark estimate as to the value of 6 these contracts? 7 A (DaFonte) I'm not quite sure I understand the question, 8 in terms of value. Is it the cost of the commodity or 9 the -- sort of the market value of the contract itself? 10 Q Market value of the contract. 11 A (DaFonte) It's hard to say. I haven't -- We haven't 12 put the contracts out to bid to get some sort of market 13 value, because there is essentially no reason to. We 14 are going to use the contracts certainly. If we 15 weren't going to use the contracts or if it was excess 16 in any way, then we would put the contracts out to bid 17 and we would calculate a value in that way. We would 18 use the RFP process to do it. There is no need at this 19 point to do that. 20 Q Well, to perhaps get at it in a slightly different way. 21 In terms of the volumes that the Company is receiving 22 during the winter, what proportion of those volumes is 23 represented by winter base load contracts? 24 A (DaFonte) I would estimate that winter base load {DG 04-162} (10-19-04) 60 [Witness Panel: Ferro|DaFonte] 1 contracts make up about, I would say, 25 or so percent 2 of the portfolio requirements. 3 MR. DAMON: Thank you. I have no 4 further questions. 5 CHAIRMAN GETZ: Is there redirect, Ms. 6 French? 7 MS. FRENCH: I had one question for Mr. 8 Ferro regarding the interruptible sales customers. 9 WITNESS FERRO: Interruptible service. 10 REDIRECT EXAMINATION 11 BY MS. FRENCH: 12 Q You had indicated, I think it was in response to one of 13 the Chairman's questions, that customers, you, after 14 the turn off, the shut off of customers during this 15 winter period, Northern would engage in renegotiating 16 the contracts with those customers, to try meet both 17 their concerns and our concerns with newly negotiated 18 contracts. What would happen to an interruptible sales 19 customer at the end of that period if they refused and 20 didn't actually enter into an interruptible 21 transportation agreement with the Company? 22 A (Ferro) Well, first, the interruptible sales contracts 23 have a provision in it that either party can terminate, 24 I believe, within 30 days written notice. So, the {DG 04-162} (10-19-04) 61 [Witness Panel: Ferro|DaFonte] 1 contracts essentially can be terminated without 2 entering into another contract, if, in fact, we cannot 3 agree upon a contractual arrangement for interruptible 4 service with these customers. Did I answer your 5 question? 6 MS. FRENCH: That was the answer I 7 expected. Thank you. I don't have any other questions. 8 CHAIRMAN GETZ: Then, the Witnesses are 9 excused. Thank you. I'll address the administrative matter 10 first. Is there any objection to striking the exhibits and 11 entering them as full exhibits? 12 (No verbal response) 13 CHAIRMAN GETZ: Hearing none, then they 14 will become full exhibits. Is there anything else we need 15 to address? 16 MS. FRENCH: Northern would ask that the 17 Commission approve the New Hampshire Division cost of gas 18 adjustment rate for the winter peak period. 19 MR. TRAUM: And, Mr. Chairman, you had 20 asked me earlier if the OCA had any problem with Exhibit 3, 21 the settlement on the LDAC. And, based upon the answers 22 that -- and what I've learned, no, we do not have any 23 problem with Exhibit 3. And, in general, we support the 24 filing. {DG 04-162} (10-19-04) 62 1 CHAIRMAN GETZ: Thank you. Mr. Damon. 2 MR. DAMON: Thank you. Staff has 3 reviewed Northern's demand and supply forecasts for the 4 upcoming winter period and recommends approval of the 5 proposed rates. The plans are consistent with those filed 6 by Northern in previous winter periods, designed to provide 7 reliable service at a reasonable cost, and these plans have 8 been approved by the Commission in the past. 9 Also, Staff notes that a cost of gas 10 reconciliation of the forecasted and actual sales will be 11 filed prior to next winter's cost of gas. And, any concerns 12 that may arise relating to this coming winter period's 13 planning and dispatch would be raised in that next winter 14 period's cost of gas proceeding. 15 As testified to by Northern, there may be an 16 issue concerning the cost allocation between New Hampshire 17 and Maine. Pending the results of the investigation of that 18 issue and the impact on costs assigned to New Hampshire, 19 Staff reserves its right to seek a disallowance of 20 additional costs that may have been incurred during the 21 2003/2004 Winter Period as a result of that allocation. 22 Finally, Staff supports the resolution of the 23 performance incentive award as outlined in the letter 24 agreement dated October 19, which is Exhibit 3. Thank you. {DG 04-162} (10-19-04) 63 1 CHAIRMAN GETZ: Thank you. Since 2 there's nothing else, then we will close this hearing and 3 take the matter under advisement. Thank you. 4 (Hearing ended at 1:24 p.m.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 {DG 04-162} (10-19-04)