BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO RE: THE TARIFF SHEETS FILED BY ) ROCKY MOUNTAIN NATURAL GAS LLC ) Docket No. 1AL- G WITH ADVICE LETTER NO. ) PREFILED DIRECT TESTIMONY AND EXHIBITS OF MARGARET LYNN NORSWORTHY SECTION PAGE I. INTRODUCTION OF WITNESS AND PURPOSE OF TESTIMONY... 1 II. COST ASSIGNMENT AND ALLOCATION AND THE SOURCEGAS CAAM... III. DIFFERENCES BETWEEN CAAMS FILED IN 0 AND IN THIS RATE CASE... IV. SALARY SPLITS EXPENSE PORTION... V. SALARY SPLITS CAPITAL PORTION... 1 VI. OTHER CAAM ISSUES... 1 VII. CONCLUSION AND RECOMMENDATION... 0

2 I. INTRODUCTION OF WITNESS AND PURPOSE OF TESTIMONY Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Margaret Lynn Norsworthy. My business address is 00 1 th Street, Suite 00, Golden, Colorado 001. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am employed by SourceGas LLC ( SourceGas ). I am a Manager of Regulatory Accounting for the SourceGas regulated operations, including those of Rocky Mountain Natural Gas LLC ( Rocky Mountain ). Q. WHAT ARE YOUR RESPONSIBILITITES AS MANAGER OF REGULATORY ACCOUNTING? A. As a manager of regulatory accounting, I support the SourceGas regulated utilities in Colorado, Arkansas, Nebraska and Wyoming. Additionally, I assist in and review development of the operating expenses associated with general and special ratemaking applications and compliance filings. My testimony in this case supports the Cost Assignment and Allocation Manual ( CAAM ) used in this proceeding by Rocky Mountain to develop the cost of service underlying the rates that it is proposing in this proceeding. Q. WHAT IS YOUR EDUCATIONAL BACKGROUND? A. I am a 1 magna cum laude graduate of Duke University, where I earned a Bachelor of Arts degree in Management Science. I earned my CPA certificate (currently inactive) in January 1. In 1, I became a graduate student at the University of Colorado at Denver. I earned two master degrees in 00, a Master of Business Administration and a Master of Science in Finance, both summa cum laude. Q. PLEASE OUTLINE YOUR PROFESSIONAL EXPERIENCE. 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

3 A. I began my professional career at Rocky Mountain College, a liberal arts institution in Billings, Montana, where I taught the accounting curriculum. My teaching load included beginning, intermediate, and advanced cost accounting and auditing. I next took a position as a manager of regulatory finance in Denver at the legacy local telephone company, U S WEST, which became Qwest and now is part of CenturyLink, Inc. For the first four years, I worked with regulatory directors supporting Idaho, Montana, New Mexico, Oregon and Wyoming regulatory affairs. I then spent six years in Public Policy and Planning, where I oversaw portions of the long range planning process, and prepared executive presentation and discussion materials for investor and rating agency meetings. I returned to the regulatory finance group in 1, where I became a director in 00. I first provided primary witness support and then became the finance witness in Colorado, New Mexico and Wyoming. I retired from Qwest in 00, and participated in Public Service Company of Colorado s Docket M-E before the Colorado Public Utilities Commission ( CoPUC ), the Clean Air Clean Jobs Act implementation docket. I was an expert accounting witness on a team that represented three natural gas producers with a keen interest in the case. In the final order in that case, the CoPUC adopted many of the positions my colleagues and I proposed. I joined SourceGas LLC in May of 0. In my time at SourceGas, I have participated in a wide variety of projects, including CAAM updates, annual reporting, rate case preparation and testimony. Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE COLORADO PUBLIC UTILITIES COMMISSION (THE COMMISSION )? A. Yes. I testified in a U S WEST multiple-location Extended Area Service application in the late s, and again in 0 in Docket No. M-E. Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

4 Q. HAVE YOU TESTIFIED BEFOR OTHER STATE REGULATORY COMMISSIONS? A. Yes. Most recently, I provided written and live CAAM testimony in the SourceGas Distribution LLC ( SourceGas Distribution ) general rate case in Nebraska, Docket No. NG-00. I also appeared multiple times before the New Mexico Public Regulation Commission and the Wyoming Public Service Commission during my time in the telecommunications industry. Q. ARE YOU SPONSORING ANY EXHIBITS WITH YOUR TESTIMONY? A. Yes. My testimony addresses the following: From the Rocky Mountain Direct Case Filing Package Exhibit VII, Schedule A - Cost Assignment and Allocation Manual effective January 1, 01 Exhibit VII, Schedule B Rocky Mountain Assignment and Allocation Factors M. Lynn Norsworthy Exhibits o MLN-1 Salary Expense Splits by Cost Center o MLN- Salary Capital Splits by Cost Center o MLN- Assignment and Allocation Factors Q. WERE THE FOREGOING SCHEDULES AND EXHIBITS PREPARED BY YOU OR UNDER YOUR SUPERVISION AND DIRECTION? A. Yes, they were. Q. HOW IS YOUR TESTIMONY ORGANIZED? A. The remainder of my testimony is arranged into sections, as follows: Section II Cost Assignment and Allocation and the SourceGas CAAM Section III Differences Between CAAMs Filed in 0 and in this Rate Case Section IV Salary Splits - Expense Portion Section V Salary Splits - Capital Portion Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

5 Section VI Other CAAM Issues Section VII - Conclusion and Recommendation II. COST ASSIGNMENT AND ALLOCATION AND THE SOURCEGAS CAAM Q. WHAT ARE THE GOALS OF COST ASSIGNMENT AND ALLOCATION? A. The fundamental goals of cost assignment and allocation are to match revenues, expenses and investment for a business unit through association of business activity exclusively with the unit, or through apportioning an activity cost to the units that benefit from it. The SourceGas system includes several regulated and non-regulated affiliates, including Rocky Mountain, that are required to bear a share of costs incurred within the SourceGas family of companies. The application of CAAM principles determines the reasonable level of expenses and plant costs to include within the cost of service for any business unit. These direct, assigned and allocated costs become the total operating expenses used to complete the revenue requirement calculations for this docket. Q. WHAT PRINCIPLES GUIDE THE APPROPRIATE LEVEL OF EXPENSE AND PLANT COSTS REFLECTED IN A BUSINESS UNIT? A. The Colorado Rules provide a thorough listing of principles to guide cost studies and cost allocation. At CCR -, Section 0, the Commission rules set forth the Cost Assignment and Allocation Principles it expects companies to use in developing fully distributed costs. Section 0 discusses the Cost Assignment and Allocation Manual ( CAAM ). In the preparation of its filing in this proceeding, Rocky Mountain has acted in full compliance with those rules, as does the SourceGas CAAM. Q. WHAT IS A COST ASSIGNMENT AND ALLOCATION MANUAL? A. It is a written document that describes, pursuant to regulatory rules, the principles and supporting procedures a company adopts to assure that the prices customers pay for Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

6 their regulated utility services recover the costs appropriate to that business unit, and further that there is no subsidy to non-regulated business activities, or over- / under- stated costs across business units. A CAAM addresses and conforms to all state statutes or regulations applicable to the subject of cost assignment and allocation. impossible to develop a rate case filing for a utility with shared resources, multi-state operations, regulated and non-regulated services and affiliates without applying cost assignment and allocation principles. Q. PLEASE DESCRIBE THE HISTORY OF THE SOURCEGAS CAAM. It is A. SourceGas became an independent entity on March 0, 00, after acquiring the retail utility business (now known as SourceGas Distribution) and Rocky Mountain assets from Kinder Morgan. On October 1, 00, in compliance with CoPUC rules, SourceGas Distribution and Rocky Mountain filed a joint application with the Commission for approval of its written CAAM. The CoPUC approved the CAAM by Decision No. R0-1, issued in Docket No. 0A-G on September 0, 00. The version of the CAAM approved by the Commission during 00 was, in all substantive respects, the CAAM filed by SourceGas Distribution in Docket No. 0S-0G, its 00 Colorado general rate case. Subsequently, the Company revised the CAAM to reflect the acquisition of SourceGas Arkansas Inc. ( SourceGas Arkansas ) in July 00 and to comply with Arkansas Public Service Commission ( APSC ) regulation. SourceGas Distribution filed that version of the CAAM in Docket No. AL-G, its 0 Colorado general rate case. The CAAM submitted by Rocky Mountain with its Advice Letter No. in this docket, designated as Exhibit VII, Schedule A, reflects additional revisions and updates that I explain in this testimony. Q. DID ROCKY MOUNTAIN RELY UPON THE CAAM IN THE DEVELOPMENT OF ITS REQUESTED REVENUE REQUIREMENT IN THIS PROCEEDING? Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

7 A. Yes. As I previously stated, Rocky Mountain applied the principles and processes outlined in the CAAM, to determine the operating expenses reflected in the Rocky Mountain Test Year revenue requirement. Rate base elements shared by multiple entities within SourceGas also used CAAM factors for their appropriate allocation to Rocky Mountain. Q. HOW OFTEN WILL SOURCEGAS UPDATE ITS ASSIGNMENT AND ALLOCATION FACTORS? A. We update all factors annually, using 1 months of data ending September 0 each year, unless business operations warrant an out-of-cycle change. The historic view updates the factors for the upcoming year, tempered with knowledge of known and measureable activities that may dictate a more future-looking approach. Such knowledge may include an increase in capital-related activities in support of a larger capital program, a focus on mandated integrity management activities (and related expenses), addition of a new affiliate company and the like. Q. WHY IS THERE NO DISCUSSION OF REVENUE ASSIGNMENTS IN THE CAAM? A. At SourceGas, any revenue stream derives from a single business unit. Therefore, the revenue is automatically associated with the proper unit in the books of record. As a result, there is no need for an allocation or assignment of revenue between or among units. 0 III. DIFFERENCES BETWEEN CAAMS FILED IN 0 AND IN THIS RATE CASE 1 Q. IS ROCKY MOUNTAIN SUBMITTING AN UPDATED CAAM WITH ITS APPLICATION IN THIS PROCEEDING? A. Yes. The updated CAAM is included in Exhibit VII, Schedule A, accompanying the Company s Advice Letter filing. In addition, I have prepared schedules to assist in the discussion of changes and updates since the last time the Commission reviewed the Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

8 SourceGas CAAM in SourceGas Distribution s Colorado rate case in Docket No. AL- G. Q. WHAT WERE THE REASONS FOR THE REVISIONS TO THE MANUAL? A. Fundamentally, the CAAM ensures the Company uses principles and procedures consistently to distribute each cost fairly and reasonably to the beneficiaries of the cost. For instance, prior to the most current update, labor distributions had been in place for a number of years, and it was prudent to review them to substantiate the accuracy of employees reported work activities and to make revisions to the earlier labor distributions, if needed. Accordingly, SourceGas initiated a thorough review of the existing methods and factors set forth in the earlier version of the CAAM. SourceGas reevaluated the written content of the CAAM to identify other changes to keep the CAAM up to date with current operations. Q. WHAT OTHER OBJECTIVES WAS SOURCEGAS ATTEMPTING TO ACHIEVE IN ITS REVISIONS TO THE CAAM? A. In addition to making appropriate revisions to the assignment and allocation methods and factors, another objective was to make the CAAM more informative and easier to follow. To achieve this goal, we removed duplicative material and placed related material together. We placed all the definitions at the beginning of the document to familiarize the reader with the vocabulary and acronyms used in the CAAM. To reduce ambiguity, we built tables in several appendices in which we have aligned each assignment or allocation method with the departments or groups that are associated with the method. We also reviewed other utility CAAMs to assure the updated CAAM is not inconsistent with industry practice. Q. YOU JUST MENTIONED DEFINITIONS. ARE THERE ANY TERMS THAT ARE PARTICULARLY IMPORTANT TO DEFINE BEFORE YOU CONTINUE? Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

9 A. Yes. A few select definitions are critical to a clear understanding of the SourceGas CAAM. First, SourceGas charges costs to Rocky Mountain and its other business units in three ways: 1) direct assignment or direct charge, which I use synonymously; ) cost causative or cost caused assignment using a unit of measure; and ) cost allocation for all remaining costs. The primary distinction between direct assignment and costcausative assignment is the number of groups or locations that benefit from the cost. A direct assignment occurs where there is one and only one beneficiary. As an example, meter reading belongs in Account 0, Meter Reading Expenses, and nowhere else. Similarly, a meter is part of plant in service for exactly one business unit. On the other hand, cost causative assignment occurs when an activity benefits more than one location and is associated with a unit of measure and its associated factor. The Company identifies a cost-causative unit of measure to assign costs reasonably to each entity and/or location that benefits from the activity. Allocation, the last method, occurs when an activity benefits more than one entity and/or location and is not assigned using a cost causative unit of measure because no clear cost causative unit of measure reasonably can be applied to those activities. In all cases, the term allocation as used in the CAAM and in my testimony refers only to the third category of costs I noted above all remaining costs. The second definition that has ongoing significance in my discussion is salary split. This is a term SourceGas uses to describe any of the ways it charges an employee s wage or salary among accounts or activities, always with sensitivity to the beneficiaries of the cost. Salaries and wages of employees who charge time directly to Rocky Mountain include a salary split for those times the employee is out of the office on an approved absence. Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

10 In connection with the salary split discussion, I also address positive time reporting. This refers to the process certain employees follow to record the time they spend directly on work activities. SourceGas hourly O&M employees (field techs) enter their work time for activities at an assigned location, including travel time to the work location, using positive time reporting. The scope of their work encompasses direct charges to operation and maintenance activities for SourceGas regulated units, construction of regulated utility assets, and operation and maintenance activities for nonregulated units. Each employee using positive time reporting must submit his or her time report to a supervisor for review and approval. The final definitions are for Operations and Construction Support ( OCS ) and Shared Services cost centers. The Company s OCS cost center employees perform work activities in direct support of field operations and the capital program. This group consists of several centralized cost centers whose employee work efforts include capital activities. The Company identified the OCS cost centers through an analysis of the work each performs. For example, engineering capital activities involve installation of transmission pipe as well as other Rocky Mountain assets. Employees associate and report their capital activities on transmission pipe installation. From an organization structure standpoint, the Company could have staffed its state cost centers with engineers, project managers and other employees who support directly the capital program. However, the Company has organized those functions centrally, at the headquarters location, to achieve efficiencies of scale and scope. The Company believes this structure also provides flexibility for employees to move from one project to another as needs arise. The engineering and GIS departments, for example, support each pipeline project by providing exact location coordinates, pipe size and type, routing, pressure, capacity and so forth. Similarly, the enterprise solutions department Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

11 supports the capital program through its development of systems and software to support the major work of the other departments. Examples include custom programming on the time entry system, gas control, utility network security, and project management software. The Shared Services cost centers include all the remaining cost centers at SourceGas, and encompass typical administrative and general support functions. Examples are human resources, legal and regulatory. I have also included two cost centers devoted to non-regulated business activities as a convenience. These cost centers, however, do not provide services subject to assignment or allocation. IV. SALARY SPLITS EXPENSE PORTION Q. HOW DOES THE SOURCEGAS CAAM DISCUSS SALARY SPLITS? A. The CAAM deals with both labor expense and capital charges. I will address labor expense first, and will then discuss capital charges. Q. HOW DOES THE SOURCEGAS CAAM TREAT THE EXPENSE PORTION OF LABOR COST? A. The CAAM outlines the ways the Company assigns the expense portion of labor among the beneficiaries of the cost. The Company employs four methods of capturing labor expense time. The first is positive time reporting. Field techs code time directly into the expense accounts associated with their work activities. For instance, if a Colorado field tech reports time related to a repair ticket for regulated service in Colorado, his or her time will book directly to the appropriate maintenance account in Colorado. For the remaining employee body, there are three additional expense distribution methods. The first of these is Other Time Reporting. The second method is cost causative assignment using a unit of measure. The third method is cost allocation using the Three-factor Allocator. Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

12 There are also four categories of cost centers addressed in the CAAM. These are (1) state cost center field techs; () other employees in state cost centers; () Operations and Construction Support ( OCS ) cost centers; and () Shared Service cost centers. Exhibit MLN-1 provides a table that associates each cost center with its related expense method. Q. PLEASE EXPLAIN THE CONTENT OF EXHIBIT MLN-1. A. I have arranged the Exhibit into the four categories of cost centers that I just defined. For each cost center, I have reflected the expense reporting method assigned to that cost center. The field techs are the positive time reporting employees, located in the state cost centers, the Arkansas operations cost center and the pipeline integrity cost centers. The second group, field employees other than the field techs, includes administrative assistants, field coordinators, division managers and any other employee titles in the state cost centers. The OCS cost centers are the third group on Exhibit MLN-1. As a reminder, these are the centralized cost centers that support directly the operations and capital activities at SourceGas. Many of these employees provide service only to the regulated utilities and use the Regulated Direct Labor assignment method. As a result, the expense portions of their salary splits appear only on the regulated utility books. None of their time books to non-regulated activities. Other employees support all facets of the business, and the Company uses the Three-factor Allocator for their salary split expense distribution. The final group is the listing of Shared Services cost centers. Like the employees in the OCS cost centers, some shared services employees serve only the regulated utility business, while others support all facets of the business. The expense Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

13 salary splits in Exhibit MLN-1 reflect the distribution method for each shared services cost center. Q. PLEASE EXPLAIN HOW YOU DETERMINE THE THREE-FACTOR ALLOCATOR AND WHY IT IS A REASONABLE FACTOR FOR DISTRIBUTING EXPENSES. A. The Three-factor Allocator is the general allocator SourceGas uses to distribute costs, both expenses and investment, when the company cannot identify a cost causative unit of measure. Table 1 below illustrates the composition and calculation of the Threefactor Allocator used in preparation of the Rocky Mountain revenue requirement and demonstrates that Rocky Mountain receives.% of expense allocated using the Three-factor Allocator. Summarized Schedule to Develop Three-Factor Allocator Dollars In Thousands Line No Entity / Location Gross Plant in Service Direct Labor Gross Margin 1 SGD Colorado 01,, 1, SGD Nebraska 1,, 1,1 SGD Wyoming 1,0,1,0 SGD Products & Services,,0 SG Arkansas,, 0, SGA Products & Services 0 Rocky Mountain Natural Gas, 1,0, SGES, 1, Totals, 1,1,00 Rocky Components Line / Line Line / Line Line / Line Resulting Component Factors 1.%.0% 1.% 1 Three-factor Allocator.% Rounded up Table 1: Three-factor Allocator 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

14 A multi-factor general allocator is among the most common in use in this industry. State regulators and the FERC have adopted a number of general allocators, many containing three elements. The three categories of cost most often included in the Three-factor Allocator are a measure of investment, a measure of sales or profit and a measure of human resources. The three inputs balance the general allocator so that it represents three significant business drivers for SourceGas. The SourceGas Three-factor Allocator is the simple average of its three component factors. SourceGas has elected to use gross plant, gross margin and direct labor as its inputs. For Rocky Mountain, the numerator of each factor is the relevant measure (plant, margin or labor) for Rocky Mountain, and the denominator is the same measure for the entire SourceGas system of companies. The company calculates each input factor individually, and averages the three to calculate the final Three-factor Allocator,.% in this case (see Exhibit VII, Schedule B). The Company applies this factor to the labor of any employee whose work activities benefit the entire scope of operations, both regulated and non-regulated. Good examples of such cost centers are the financial planning and analysis, treasury and tax departments. The Company believes this Three-factor Allocator produces a fair and reasonable allocation of costs among the beneficiaries of the cost. Q. CAN YOU PROVIDE A SIMILAR TABLE TO SUPPORT YOUR CALCULATION OF THE REGULATED DIRECT LABOR FACTOR? A. Yes. The Regulated Direct Labor factor starts with the Direct Labor column of the Three-factor Allocator table. In this calculation, we exclude direct labor non-regulated business units, because these represent direct labor associated with non-regulated activities. Table below illustrates the calculation of the Regulated Direct Labor factor, and demonstrates that Rocky Mountain receives.% of expenses assigned using this factor (see Exhibit VII, Schedule B). 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

15 Summarized Schedule to Develop Regulated Direct Labor Factor Dollars In Thousands Line No Entity / Location Direct Labor 1 SGD Colorado, SGD Nebraska, SGD Wyoming,1 SGD Products & Services SG Arkansas, SGA Products & Services Rocky Mountain Natural Gas 1,0 SGES Totals, Regulated Direct Labor Factor.% Table : Regulated Direct Labor Factor Q. WHY IS THE REGULATED DIRECT LABOR UNIT OF MEASURE METHOD REASONABLE? A. The Regulated Direct Labor unit of measure recognizes the fact that many SourceGas employees work is for the benefit of the regulated utilities. For example, SourceGas records all its utility plant in service as regulated. Therefore, the construction of plant such as transmission pipe is for the benefit of the regulated utilities. Similarly, a number of OCS and shared services cost centers and employees are dedicated solely to the regulated utilities, including engineering, project management and the meter shop. It is not appropriate to assign costs to non-regulated units when they do not benefit from the labor of an individual employee. The Regulated Direct Labor assignment method is a fair and reasonable method because it recognizes the fact that certain employees work efforts relate only to regulated activities. Q. DO THE ASSIGNMENT METHODS THAT YOU HAVE DISCUSSED ACCOUNT FOR ALL SOURCEGAS EMPLOYEES? 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

16 A. No. On Exhibit MLN-1, I also show the two assignment methods that apply to the billing, customer service and collection functions and the customer care function. However, Rocky Mountain does not benefit from these activities, so it does not receive any charges from these cost centers. Specifically, Rocky Mountain uses a different billing system than the system used by SourceGas Arkansas and SourceGas Distribution and handles its customer care and collections activities separate from the cost centers providing these functions for the two local distribution companies ( LDCs ). The CAAM contains details regarding these two assignment methods and their units of measure applicable to the LDCs but not to Rocky Mountain, and I will not discuss them here. V. SALARY SPLITS CAPITAL PORTION Q. HOW DOES THE SOURCEGAS CAAM TREAT THE CAPITAL PORTION OF LABOR COSTS? A. SourceGas is a capital-intensive business. In 01, the Company plans to spend over $0 million on capital projects, representing a 0% increase in the capital program over the last four years. Every employee at SourceGas is dedicated, in whole or in part, to assure the network is always ready to serve customers reliably and safely. To serve customers well, the Company must maintain a safe and reliable pipeline and gas delivery network, and place new facilities where required - or where economic or other conditions merit if not required. Additionally, the Company must have gas supply that is safe, reliable and ready to deliver. The CAAM outlines the methods by which the Company capitalizes a portion of labor. Q. WHAT METHODS DOES SOURCEGAS USE FOR CAPITALIZING WAGES AND SALARIES? A. There are two types of labor capitalization at SourceGas -- direct capital charges and indirect capital charges. There are three groups of employees who charge capital 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

17 projects directly: (1) the field techs; () the field coordinators, managers and administrative support employees; and () the OCS employees. Shared Services employees use indirect capitalization. Field techs charge time directly to capital projects through their positive time reporting. Most of Rocky Mountain s field techs perform capital project activities as well as O&M activities. The remaining state cost center employees use Other Time Reporting, as do the majority of the Operations and Construction Support cost centers, to substantiate their work activities related to capital. Their periodic time reports account for 0% of their work time, with detail that captures capital activities. Q. HOW DO YOU DETERMINE CAPITALIZATION FOR THE EMPLOYEES IN SHARED SERVICES COST CENTERS? A. The Shared Services cost centers do not support capital directly, so there is no direct assignment of cost from these cost centers to the capital program. Instead, the Company establishes a capital overhead rate that it applies to all capital projects over the course of a year. The following descriptions and formulae outline the process the Company uses to identify the amount of labor and other expenses in the shared services cost centers to include as capital overhead. Formula (expressed as a percentage): (DLC / TGL) * GSSL = SSCLR DLC = Direct Labor Capitalized (field techs, other field, OCS) TGL = Total Gross Labor GSSL = Gross Shared Services Labor SSCLR = Shared Services Capitalized Labor Rate This same factor applies to the other employee-related expenses the Company treats as eligible for overhead capital treatment. The additional expenses are: Payroll taxes; Employee benefits; and 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

18 Select other employee-related expense. The Company sums the individual overhead capital amounts, and calculates a rate per dollar of capital spend that will apply the entire sum to plant under construction throughout the year. The formula for this calculation is Total Overhead Capital as Calculated Above Total Capital Spend Available for Overhead Charges The Company rate for applying overhead to qualifying capital projects during the Test Year in this case is just under 1.%. The indirect capital charge is not associated with a cost center or an employee. Rather, it is a rate applied to the state where the construction work is occurring, As the Company applies the capital overhead to construction, it credits a state level Account, Administrative Expenses Transferred (a credit balance account). Q. PLEASE SUMMARIZE THE CAPITALIZATION METHODS OUTLINED IN THE CAAM, AND EXPLAIN WHY THE RESULTING CHARGES TO CAPITAL ARE REASONABLE. A. I have prepared Exhibit MLN- to outline the capitalization methods outlined in the CAAM. The first method, direct reporting through positive time reporting, takes capital input directly from time records. Direct capital through other time reporting captures the field employees who do not use positive time reporting, along with employees in most of the OCS cost centers. This method is reasonable because it requires each employee to substantiate his or her capital work activities with written documentation throughout the year. Additionally, this substantiation is part of the annual review. The remaining OCS cost centers fall into the direct capitalization category associated with a cost causative unit of measure. In each case, the unit of measure is relevant to the business unit using it, and associates the work effort directly with the capital program. Finally, the Shared Services cost centers are involved in back office or general support for the capitalintensive nature of the business. Because their work supports the capital program 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

19 indirectly, it is appropriate to use an indirect method to apply this overhead to active capital projects. The method is reasonable because it associates an appropriate administrative and general labor cost with the capital program. VI. OTHER CAAM ISSUES Q. SO FAR YOU HAVE DISCUSSED LABOR CAPITALIZATION. HOW DOES THE CAAM TREAT COSTS OTHER THAN LABOR? A. The Company capitalizes a portion of payroll taxes, employee benefits and employeerelated charges in the same way as the individual employee labor reaches the capital construction projects. Direct labor charges to capital generate a companion direct charge of payroll taxes, benefits and employee-related charges. I have already explained the process by which the Company determines the addition of these costs to capital overhead. Company insurance, occupancy costs and vehicle depreciation also contribute to capital overhead. Even with these additional charges to capital, the capital overhead rate remains under %. Q. CAN YOU ESTIMATE THE EFFECT OF THE CAAM CHANGES YOU HAVE IDENTIFIED AND OUTLINED ON THE TOTAL OPERATING COSTS AT ROCKY MOUNTAIN? A. It is difficult to isolate the effect of a single CAAM change or a group of changes on the total expenses at Rocky Mountain. In addition to any method updates, the CAAM factors change annually through the regular update process. However, a good way to estimate the change in expenses from one CAAM version to the next is to look at the pattern of factor changes over time. I have prepared Exhibit MLN- to illustrate the trends for all factors with a Rocky Mountain impact beginning with the factors in place for calendar year Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

20 The first seven columns of factors are the assignment and allocation factors for each year. The second set of seven columns calculates the year over year change in the factors. The Three-factor Allocator is common across all the years I have included in my Exhibit MLN-. Rocky Mountain s factor has varied from a low of.% in 0 to a high of.% in 0. This year s factor, as illustrated in Table 1 of this testimony, is.%, and has averaged.01% over the measurement periods. The factor for Regulated Direct Labor is new in 01, so there is no history to analyze. Should SourceGas realize a larger proportion of its business in non-regulated activities, the Rocky Mountain factor for Regulated Direct Labor will fall, all other things being equal. Conversely, if the level of non-regulated business activities falls, the Rocky Mountain factor for Regulated Direct Labor will rise. Other variables incorporated into SourceGas assignment and allocation factor calculations include a change in the amount of direct labor after the introduction of updated salary split methods and factors; reclassification of a portion centralized labor from the Three-factor Allocator to Regulated Direct Labor assignment and changes in the relative composition of gross plant in service among the various business units. Q. HOW DOES SOURCEGAS ENSURE IT IS NOT OVER- OR UNDER-RECOVERING ITS TOTAL COSTS ACROSS ALL JURISDICTIONS? A. As can be proven using Exhibit MLN-, the jurisdictional / business unit components of each assignment or allocation factor add to 0%, so that in no case does a business unit receive more than its calculated share of costs based upon the designated method and factor. Changes in factors from year to year add to 0% on each line of the columns showing changes, which indicates the 0% rule applies annually, regardless of the changes for an individual business unit. Further, each cost center uses only one method of assigning or allocating expense and capital. That is, if a corporate expense in a 1 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G

21 particular cost center is distributed to benefited business units based upon Regulated Direct Labor factors, then once it is distributed, it cannot be added to the allocable expenses subject to the Three-factor Allocator the balance of expense in the cost center is zero after the first assignment. The Company proves the math by making sure that total costs assigned and allocated equal total costs across the business. In other words, the sum of all expenses recorded by business unit equal the total Company expenses. Similarly, the sum of all plant in service by business unit equals the total Company plant in service. VII. CONCLUSION AND RECOMMENDATION Q. PLEASE SUMMARIZE YOUR CONCLUSION AND RECOMMENDATION RESPECTING THE UPDATED CAAM. A. The Commission s rules dictate each company have a CAAM that assigns or allocates costs reasonably and fairly across business units, jurisdictions and service areas. As I have explained at length in my testimony, the assignment and allocation methods incorporated in the current CAAM provide fair and reasonable assignments and allocations of costs. Moreover, as revised and updated, the CAAM is more informative and comprehensible to the reader. For these reasons, I recommend that the Commission approve use of the updated CAAM and accept the revenue requirement in this proceeding based upon the assignment and allocation methods and factors set forth therein. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. 0 Prefiled Direct Testimony of M. Lynn Norsworthy Docket No. 1AL- G