PUC DOCKET NO DIRECT TESTIMONY AND EXHIBITS RALPH G. GOODLET, JR. ON BEHALF OF SHARYLAND UTILITIES, L.P. May 31, 2013

Transcription

1 PUC DOCKET NO. 1 APPLICATION OF SHARYLAND UTILITIES, L.P. TO ESTABLISH RETAIL DELIVERY RATES, APPROVE TARIFF FOR RETAIL DELIVERY SERVICE, AND ADJUST WHOLESALE TRANSMISSION RATE PUBLIC UTILITY COMMISSION OF TEXAS DIRECT TESTIMONY AND EXHIBITS OF RALPH G. GOODLET, JR. ON BEHALF OF SHARYLAND UTILITIES, L.P. May 1, 01

2 PUC DOCKET NO. 1 APPLICATION OF SHARYLAND UTILITIES, L.P. TO ESTABLISH RETAIL DELIVERY RATES, APPROVE TARIFF FOR RETAIL DELIVERY SERVICE, AND ADJUST WHOLESALE TRANSMISSION RATE PUBLIC UTILITY COMMISSION OF TEXAS TABLE OF CONTENTS PAGE I. INTRODUCTION...1 II. PURPOSE OF DIRECT TESTIMONY... III. SHARYLAND UTILITIES HISTORY, OPERATIONS AND ORGANIZATION... IV. PURPOSE OF SHARYLAND UTILITIES RATE FILING... V. PRIOR COMMITMENTS... VI. INTEGRATION OF CAP ROCK INTO SHARYLAND UTILITIES...1 VII. SHARYLAND UTILITIES RATE FILING PACKAGE... VIII. OVERVIEW OF SHARYLAND UTILITIES REVENUE REQUIREMENT... IX. KNOWN AND MEASURABLE ADJUSTMENTS... X. FARMERSVILLE AGREEMENT... XI. AFFILIATE EXPENSES... XII. A&G EXPENSES...1 XIII. SUPPORT FOR OTHER RFP ELEMENTS... A. Deferred Costs... B. Proposed Riders... C. Distribution Cost Recovery Factor... XIV. RATE CASE EXPENSES... A. Amount and Type of Expenses... B. Reasonableness and Necessity of Expenses... XV. COST ALLOCATION AND RATE DESIGN...0 XVI. WHOLESALE TRANSMISSION SERVICE RATE... XVI. CONCLUSION...0 of Ralph G. Goodlet, Jr. i Docket No. 1

3 EXHIBITS RGG-1: RGG- : RGG- : RGG- : RGG-: RGG-: RGG-: RGG-: Goodlet Previous Testimony Sponsorship/Co-Sponsorship of Schedules Sharyland Utilities, L.P. Service Area Map Sharyland Utilities, L.P. Ownership Structure Chart List of Witnesses Farmersville Agreement Deferral Calculation Formula Rate Case Expense Chart of Ralph G. Goodlet, Jr. ii Docket No. 1

4 DIRECT TESTIMONY AND EXHIBITS OF RALPH G. GOODLET, JR. I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Ralph G. Goodlet, Jr. My business address is 0 N. Akard Street, Dallas, Texas 01. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am employed by Sharyland Utilities, L.P. ( Sharyland Utilities ) as Senior Vice President. In this capacity, I have responsibility for all regulatory matters involving Sharyland Utilities. I am also Senior Vice President of Regulatory Affairs for Hunt Power, L.P. ( Hunt Power ). Q. PLEASE DESCRIBE YOUR EDUCATIONAL QUALIFICATIONS AND PROFESSIONAL EXPERIENCE. A. I received my BBA in accounting from Texas Tech University in 1. In March 1, I was employed by the Audit Division of the Texas Education Agency. My responsibilities included field audits, special investigations, review of annual reports, and quality reviews of annual audits of independent school districts. In 1, I took a position with S.M. Shaver & Co., P.C. as a staff accountant. My duties included the performance of audits and reviews, as well as the preparation of corporate and individual tax returns. In 1, I went to work for the Public Utility Commission of Texas ( Commission ) as a regulatory accountant. My duties at the Commission included the review and analysis and preparation of testimony in telephone and electric utility rate proceedings. In, I completed my MBA at Texas State University-San Marcos, and joined GDS Associates, Inc., a consulting firm, and where I worked on a variety of regulatory matters involving telephone and electric proceedings before the Commission. I joined the Hunt organization in 000, where I am currently employed. of Ralph G. Goodlet, Jr. 1 Docket No. 1

5 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION? A. Yes. I have provided expert testimony in numerous cases before the Commission. In addition to providing testimony, I have participated in settlement negotiations in several cases. A list of regulatory proceedings in which I have presented expert testimony is provided as Exhibit RGG-1. II. PURPOSE OF DIRECT TESTIMONY Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY IN THIS PROCEEDING? A. I am the principal policy witness for Sharyland Utilities. I will describe our history and operations, explain the background and reason for this rate filing, and provide a general overview of the rate filing package ( RFP ). I will also identify the witnesses who are submitting direct testimony in support of the RFP. Q. DO YOU SPONSOR ANY EXHIBITS IN THIS CASE? A. Yes. I sponsor Exhibits RGG-1 through RGG-, which are attached to my direct testimony. Q. ARE YOU SPONSORING OR CO-SPONSORING ANY SCHEDULES INCLUDED AS PART OF THE RATE FILING PACKAGE? A. Yes. Exhibit RGG- shows my sponsorship and co-sponsorship of schedules in this case. Q. WERE THESE EXHIBITS, SCHEDULES, AND THIS TESTIMONY PREPARED BY YOU OR UNDER YOUR DIRECTION? A. Yes. These exhibits, schedules, and testimony were prepared by me or under my direction. The information contained in these exhibits, schedules, and testimony is true and correct to the best of my knowledge. of Ralph G. Goodlet, Jr. Docket No. 1

6 III. SHARYLAND UTILITIES HISTORY, OPERATIONS AND ORGANIZATION Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF SHARYLAND UTILITIES, ITS HISTORY, AND ITS OPERATIONS. A. Sharyland Utilities was formed in 1. It received a Certificate of Convenience and Necessity ( CCN ) in Docket No. 0 in 1 to provide retail electric service to Sharyland Plantation, a new planned community then being developed between the Cities of McAllen and Mission ( Cities ), Texas, along the border between Texas and Mexico. 1 Prior to development, Sharyland Plantation was used primarily as farmland with limited electrical infrastructure in place, so the transmission and distribution system to serve the new community was constructed by Sharyland Utilities on a greenfield basis. Since Sharyland Utilities began serving its first customer in the McAllen division in February 000, its systemwide load for all five divisions has grown to approximately megawatts ( MW ) as of December 1, 01. Sharyland Utilities also constructed a MW high voltage direct current ( HVDC ) interconnection between ERCOT and the Mexican electric grid, Comisión Federal de Electricidad ( CFE ), and is currently expanding the interconnection to 00 MW. In addition to building the transmission and distribution infrastructure necessary to serve its retail load in Sharyland Plantation, Sharyland Utilities also was designated by the Commission to construct, operate, and maintain approximately 00 miles of kv transmission lines in the Panhandle and South Plains regions of Texas to collect wind energy from Competitive Renewable Energy Zones ( CREZ ) in those areas and deliver it to major load centers in 1 Application of Sharyland Utilities, L.P. for a Certificate of Convenience and Necessity in Hidalgo County, Texas, Docket No. 0, Order (Jul., 1). Application of Sharyland Utilities, L.P. for a Certificate of Convenience and Necessity ( CCN ) for a 1 kv Transmission Line in Hidalgo County, Texas, to Implement a High Voltage Direct Current Interconnection with Comisión de Federal de Electricidad, Docket No., Order (Apr. 0, 00). of Ralph G. Goodlet, Jr. Docket No. 1

7 ERCOT. Sharyland Utilities is in the process of building these facilities and expects to complete construction of all facilities by the end of 01. Sharyland Utilities is also taking steps to help strengthen the electric infrastructure in the Lower Rio Grande Valley where Sharyland s McAllen division is located. This includes construction in conjunction with Electric Transmission Texas, LLC ( ETT ) of a new kv transmission line from Edinburgh to the Loma Alta station at Brownsville. Sharyland Utilities and ETT anticipate filing a CCN application for the new line in June 01. Depending on the route selected, this line will be approximately - 1 miles in length. In July 0, Sharyland Utilities acquired control of Cap Rock Energy Corporation ( Cap Rock ), which operated four separate divisions, now the Brady (formerly McCullough), Celeste (formerly Hunt/Collin), Colorado City (formerly Lone Wolf), and Stanton divisions. The Colorado City and Stanton divisions are currently interconnected primarily to the Southwest Power Pool ( SPP ) and purchase power to serve their customers from Southwestern Public Service Company ( SPS ). The Brady and Celeste divisions are interconnected to ERCOT and currently purchase wholesale power from the Lower Colorado River Authority ( LCRA ) and the City of Garland. Pursuant to the Commission s order in Docket No. 00, the Stanton and Colorado City divisions will be disconnected from SPP by the end of 01 and interconnected to ERCOT. Thus, Sharyland Utilities currently has five retail divisions that are geographically separated the original McAllen division in South Texas and the Remand of Docket (Commission Staff s Petition for Selection of Entities Responsible for Transmission Improvements Necessary to Deliver Renewable Energy from Competitive Renewable-Energy Zones), Docket No. 0, Order on Remand (Mar., 0). Joint Report and Application of Sharyland Utilities, L.P., Sharyland Distribution & Transmission Services, L.L.C., Hunt Transmission Services, L.L.C., Cap Rock Energy Corporation, and NewCorp Resources Electric Cooperative, Inc. for Regulatory Approvals Pursuant to PURA 1.1,.1,., and.1, Docket No. 0, Order (Jul., 0) ( Acquisition Settlement Order ). Application of Sharyland Utilities, L.P. to Approve Study and Plan Pursuant to the Commission s Order in Docket No. 0 Concerning the Movement of Sharyland s Stanton and Colorado City Divisions from the Southwest Power Pool to ERCOT, Docket No. 00, Order (Jul., 0) ( ERCOT Transfer Settlement Order ). of Ralph G. Goodlet, Jr. Docket No. 1

8 four former Cap Rock divisions acquired in 0. To distinguish these divisions, I refer to the four former Cap Rock divisions as Sharyland, the McAllen division as Sharyland-McAllen, and the entire utility as Sharyland Utilities. However, as explained by Mark E. Caskey in his direct testimony, all five retail divisions are operated on an integrated basis. A service area map showing the location of the five divisions is attached to my testimony as Exhibit RGG-. Q. HOW DO THE FOUR SHARYLAND DIVISIONS DIFFER FROM SHARYLAND-MCALLEN? A. The four Sharyland divisions differ from the Sharyland-McAllen division in many respects. The four Sharyland divisions, while under the control of Cap Rock and since the acquisition by Sharyland Utilities, have been operated as a bundled utility and have not participated in retail competition. Sharyland-McAllen has participated in retail competition since the inception of customer choice in the ERCOT region in 00. Thus, the four Sharyland divisions currently have bundled rates with customer classes that are different from the Commission s generic unbundled customer classes, while Sharyland-McAllen has unbundled rates based on the generic customer classes that have been in effect for several years. The nature of the service areas is also different, with the Sharyland Utilities area being largely rural and the Sharyland-McAllen area being far more densely populated. The Stanton and Colorado City divisions also serve a large number of oil and gas and agricultural customers, including irrigation loads, while the Sharyland-McAllen division serves largely residential and commercial customers. Q. WHICH DIVISIONS DOES THIS APPLICATION AFFECT? A. With respect to retail rates, in accordance with the settlement approved by the Commission in Docket No. ( Retail Competition Settlement ), this Application relates solely to the four Sharyland divisions. It does not affect the retail rates for Sharyland-McAllen. As discussed in Section XVI of my of Ralph G. Goodlet, Jr. Docket No. 1

9 testimony, we are also requesting approval of a new wholesale transmission service rate. Q. PLEASE DESCRIBE THE GROWTH THAT HAS OCCURRED ON THE SHARYLAND UTILITIES SYSTEM SINCE 0 WHEN SHARYLAND UTILITIES ACQUIRED CAP ROCK. A. In 0, the four Sharyland divisions combined peak load was 1 MW, and that load grew to MW in 0 and 1 MW in 01. The large majority of this rapid growth is attributable to increased oil and gas loads. Because of the growth, Sharyland Utilities has had to make substantial investments in Sharyland Utilities system in order to reliably serve its loads. Mr. Caskey describes these investments in more detail in his direct testimony. Q. PLEASE EXPLAIN HOW SHARYLAND UTILITIES IS ORGANIZED. A. Sharyland Utilities is owned by Hunter L. Hunt of Dallas, Texas, and members of his family. It is organized as a limited partnership and is controlled and managed by Mr. Hunt. SU FERC, L.L.C. ( SU FERC ) is a wholly owned subsidiary of Sharyland Utilities and operates the transmission facilities serving the Stanton and Colorado City divisions which are interconnected to SPP and currently FERCjurisdictional. After the Stanton and Colorado City divisions are moved to ERCOT at the end of 01, the transmission facilities will be operated by Sharyland Utilities rather than SU FERC. Q. PLEASE EXPLAIN THE OWNERSHIP STRUCTURE FOR SHARYLAND UTILITIES TRANSMISSION AND DISTRIBUTION ASSETS. A. In 00, the Commission issued an order in Docket No. approving a restructuring plan for Sharyland Utilities in order to allow broader alternatives for obtaining equity for significant capital expenditures, including the use of a master limited partnership ( MLP ) or real estate investment trust ( REIT ) to facilitate investment. Pursuant to that order, Sharyland Utilities transferred its ownership Application of Sharyland Utilities, L.P. and Sharyland Distribution & Transmission Services, L.L.C. for Regulatory Approvals Pursuant to PURA 1.1,., and.1, Docket No., Final Order (Jul. 1, 00). of Ralph G. Goodlet, Jr. Docket No. 1

10 1 1 1 interests in its transmission and distribution assets to Sharyland Distribution & Transmission Services, L.L.C. ( SDTS ). Under the arrangement approved by the Commission, Sharyland Utilities leases the assets from SDTS. When Sharyland Utilities acquired control of Cap Rock, the Commission s order in Docket No. 0 authorized Sharyland Utilities and its subsidiary SU FERC to utilize this same structure for the Cap Rock ERCOT and SPP assets. The Cap Rock assets were transferred to SDTS and its subsidiary SDTS FERC, L.L.C. ( SDTS FERC ). As required by the orders in Docket No. and 0, Sharyland Utilities and its wholly-owned subsidiary, SU FERC, continue to hold the CCNs for all of the utility s assets and have sole responsibility for operating the electric system and complying with all Commission requirements relating to Sharyland Utilities and SU FERC s operations. A chart showing the ownership structure is attached to my testimony as Exhibit RGG-. 1 IV. PURPOSE OF SHARYLAND UTILITIES RATE FILING Q. WHAT IS THE PURPOSE OF SHARYLAND UTILITIES RATE APPLICATION IN THIS PROCEEDING? A. As explained below, the Commission has directed Sharyland Utilities to transition the four Sharyland divisions to retail competition commencing on May 1, 01, or 0 days after Sharyland Utilities files its tariffs to implement the approved unbundled delivery rates, whichever is later. To do so, new unbundled delivery rates for the various customer classes must be established before we can offer customer choice. Therefore, in this rate case, Sharyland Utilities is seeking approval of unbundled retail delivery rates for the four Sharyland divisions so that retail competition can be implemented in those areas. In addition, we are seeking to establish a revised wholesale transmission service rate. See Docket No. 0, Order at (Jul., 0). of Ralph G. Goodlet, Jr. Docket No. 1

11 Q. PLEASE DESCRIBE THE PRIOR COMMISSION PROCEEDINGS THAT HAVE LED TO THE FILING OF THIS APPLICATION. A. There are three prior proceedings that led to this case: Docket No. 0, approving Sharyland Utilities application to acquire Cap Rock; Docket No. 00, approving Sharyland Utilities proposal to move the two former Cap Rock divisions that were interconnected to the SPP grid to the ERCOT grid; and Docket No., approving Sharyland Utilities proposal to transition all four Cap Rock divisions to retail competition. As I mentioned above, this Application stems from the acquisition of Cap Rock pursuant to the Commission s approval of the settlement granting Sharyland Utilities application to acquire control of Cap Rock in Docket No. 0. Among other things, the Acquisition Settlement required Sharyland Utilities to evaluate and file two separate proposals, one relating to moving the Stanton and Colorado City divisions from SPP to ERCOT and the other relating to transitioning the four Sharyland divisions to retail competition. Consistent with its commitment in the Acquisition Settlement, Sharyland Utilities filed a proposal in Docket No. 00 to move the Colorado City and Stanton divisions from SPP to ERCOT and set forth several different options for accomplishing that objective. The parties reached a settlement, and on July, 0, the Commission issued an order consistent with the settlement. The settlement provided that the Colorado City and Stanton divisions would be moved to ERCOT by the end of 01 and set forth an Agreed Transfer Option for disconnecting the Colorado City and Stanton divisions from SPP and interconnecting them to ERCOT. This option includes the construction of certain new facilities, which is currently underway. Sharyland Utilities expects Docket No. 0, Order (Jul., 0). The Acquisition Settlement approved in Docket No. 0 requires Sharyland Utilities to leave the Borden to Midland 1 kv transmission line interconnected to SPP, but all of the Company s loads and other facilities in the Stanton and Colorado City divisions will be transferred to ERCOT. If a pending proposal in Docket No. 10 in which SPS would sell certain transmission facilities to Sharyland Utilities receives necessary regulatory approvals, SPS will relinquish its right to require the Company s Borden to Midland line remain interconnected with SPP. of Ralph G. Goodlet, Jr. Docket No. 1

12 that the facilities will be completed prior to January 1, 01, consistent with the Commission s order in Docket No. 00. At that time, the Colorado City and Stanton divisions will be fully disconnected from SPP and interconnected to ERCOT. Next, and also consistent with the commitment in the Acquisition Settlement, Sharyland Utilities filed in Docket No. its evaluation and recommendation concerning whether the four Sharyland divisions should be transitioned to retail competition. Sharyland Utilities initially recommended that retail competition be implemented for those divisions on January 1, 01, after the Colorado City and Stanton divisions were interconnected to ERCOT, and proposed procedures to implement the transition in an orderly fashion. The parties conducted extensive settlement discussions during 0 and the first few months of 01 and submitted the Retail Competition Settlement resolving all issues in the proceeding on March, 01. Among other things, the settlement revised the date for the initiation of retail competition to May 1, 01, or 0 days after Sharyland Utilities filed tariffs implementing the final order in its rate proceeding, whichever is later. The Retail Competition Settlement was ultimately unopposed and was approved by the Commission in August 01. Q. CAN YOU DESCRIBE THE PURPOSE OF THIS PROCEEDING? A. This is a proceeding to establish retail delivery rates for Sharyland Utilities in order to implement the Commission s order in Docket No. and to introduce retail competition to the four Sharyland divisions pursuant to PURA.(d) and (e). In this respect, it is similar to the unbundled cost of service ( UCOS ) proceedings conducted before the Commission prior to the implementation of retail competition for ERCOT transmission and distribution utilities on January 1, 00, in accordance with PURA.01. As shown in Mr. Lain s testimony, the Application of Sharyland Utilities, L.P. to Approve Retail Plan Pursuant to the Commission s Order in Docket No. 0 and for Other Relief, Docket No., Final Order (Aug., 01) ( Retail Competition Settlement Order ). of Ralph G. Goodlet, Jr. Docket No. 1

13 Company s proposed revenue requirement is approximately the same as the revenues that Sharyland Utilities currently effective rates would produce. Q. YOU REFERRED TO CERTAIN PROVISIONS OF PURA IN YOUR PRECEDING ANSWER. HOW DO THOSE PROVISIONS APPLY TO SHARYLAND UTILITIES? A. PURA.(d) and (e) were adopted by the legislature in 00 when the legislature repealed the provision of PURA that exempted Cap Rock from Commission regulation. These provisions provide broad authority to the Commission to establish schedules and procedures and require commission approvals as it deems necessary to achieve the objectives of this chapter and set forth a number of factors that the Commission should consider in approving a schedule for transitioning Cap Rock to retail competition. As discussed above, the Commission adopted a schedule for transitioning the four Sharyland divisions to retail competition in Docket No. and Sharyland Utilities application in this proceeding is being filed in accordance with that schedule. V. PRIOR COMMITMENTS Q. DID SHARYLAND UTILITIES MAKE CERTAIN COMMITMENTS IN THE PROCEEDINGS YOU DESCRIBED ABOVE THAT ARE RELEVANT TO THIS PROCEEDING? A. Yes. Most of the commitments are set forth in the order approving the Retail Competition Settlement in Docket No.. However, there are also certain commitments in the orders approving the Acquisition Settlement in Docket No. 0 and the ERCOT Transfer Settlement in Docket No. 00 that relate to this case. Q. PLEASE DESCRIBE THE COMMITMENTS IN DOCKET NOS. 0 AND 00 THAT ARE APPLICABLE TO THIS PROCEEDING. A. Three commitments in those proceedings are applicable to this case. First, Sharyland Utilities agreed in Docket No. 0 that it would not seek to recover of Ralph G. Goodlet, Jr. Docket No. 1

14 the costs of the transaction to acquire Cap Rock in its rates. Mr. David White testifies that Sharyland Utilities has complied with this commitment. Second, Sharyland Utilities made certain commitments concerning treatment of its oil and gas loads in Docket No Since this issue was also addressed in the Retail Competition Settlement, I will discuss this issue below. Third, Sharyland Utilities agreed in Docket No. 00 to propose in its next general rate case appropriate accounting adjustments to the original cost and current depreciated value of its transmission facilities for the Colorado City and Stanton divisions in light of an audit report to be prepared concerning the proper original cost and depreciated value of those facilities. 1 Sharyland Utilities filed its audit report in Docket No. 00 on September 1, 0, and a supplement on November, 0. 1 Consistent with the ERCOT Transfer Settlement, Sharyland Utilities has incorporated adjustments to the original cost and current depreciated value of the Stanton and Colorado City transmission facilities in its rate filing in this proceeding in light of the audit report and supplement filed in Docket No. 00. Q. YOU MENTIONED THAT MOST OF THE COMMITMENTS RELATING TO SHARYLAND UTILITIES RATE FILING WERE MADE IN THE RETAIL COMPETITION SETTLEMENT APPROVED BY THE COMMISSION IN DOCKET NO.. CAN YOU DESCRIBE THOSE COMMITMENTS? A. Yes. Several of the provisions are found in Paragraph 1.d of the final order in Docket No.. They include the following: 1. Sharyland Utilities will file its application to establish retail delivery rates no later than May 1, 01 ( May 01 Application ). See Acquisition Settlement Order at 1, FoF No. 1.g (Jul., 0). 1 Id. at -, FoF No. 1.e. 1 See ERCOT Transfer Settlement Order at 1, FoF No. 1.f (Jul., 0). 1 Docket No. 00, Supplement to September 1, 0 Filing Pursuant to Section II.B.1 of Stipulation and Agreement (Nov., 0). of Ralph G. Goodlet, Jr. Docket No. 1

15 Sharyland Utilities will utilize the twelve months ending December 1, 01, as its Test Year in its May 01 Application.. Sharyland Utilities will collect load research data for the purpose of preparing its cost-of-service study in its May 01 Application for the period beginning in the month of February 01 and ending with the December 01 billing cycle.. Sharyland Utilities May 01 Application will propose rates for the four Sharyland divisions on a combined basis, but will not include Sharyland-McAllen.. Sharyland Utilities will develop the load, cost data, and system load growth data and all other data it is required to develop pursuant to the Commission s regulations and the Commission s Rate Filing Package, except for the requirement that the utility provide three years of functionalized historical data as required by Schedules D-., D-., D-., D-., and D-. of the Rate Filing Package. Sharyland Utilities will provide functionalized data for the Test Year as required by the Rate Filing Package. Sharyland Utilities will not be precluded from requesting a waiver of any other requirement in its Rate Filing Package if necessary, but all Stipulating Parties will be free to oppose such request.. Sharyland Utilities will not file an application to automatically adjust its rates under a Distribution Cost Recovery Factor ( DCRF ) pursuant to P.U.C. SUBST. R.. prior to the issuance of a final order approving retail delivery rates for the four Sharyland divisions.. No interim rate reduction or increase will be implemented prior to the date that Sharyland Utilities unbundled retail delivery rates become effective. of Ralph G. Goodlet, Jr. 1 Docket No. 1

16 Q. HAS SHARYLAND UTILITIES COMPLIED WITH THESE COMMITMENTS IN THIS RATE FILING? A. Yes. Q. ARE THERE ANY OTHER COMMITMENTS IN DOCKET NO. THAT RELATE TO THIS RATE PROCEEDING? A. Yes. As part of the Retail Competition Settlement, Sharyland Utilities also agreed to other commitments relating to this proceeding. These involve certain commitments concerning the classification of oil and gas loads, the treatment of so-called Behind the Meter Lines, and advanced metering issues. 1 Q. HAS SHARYLAND UTILITIES ALSO COMPLIED WITH THESE COMMITMENTS? A. Yes. Q. PLEASE EXPLAIN HOW SHARYLAND UTILITIES HAS COMPLIED WITH ITS COMMITMENTS IN PRIOR SETTLEMENTS WITH RESPECT TO OIL AND GAS LOADS. A. With respect to oil and gas loads, Sharyland Utilities agreed in Docket No. to include sufficient cost and load data in its May 01 Application to allow the Commission to establish an oil and gas class at the conclusion of the rate proceeding if the Commission desires. 1 Sharyland Utilities also agreed to file a pro forma oil and gas tariff as part of its Application. Similar commitments were contained in the Acquisition Settlement in Docket No. 0. Sharyland Utilities has included the necessary information to allow the Commission to address the appropriateness of a separate oil and gas class in this proceeding. This is discussed in more detail in the testimony of Messrs. John Hutts and Richard Lain. In addition, Sharyland Utilities is proposing that the Commission adopt small ( kw or less) and large ( kw and greater) secondary oil and gas classes in this proceeding. As explained by Mr. Lain, the adoption of secondary oil and gas classes reflects the different characteristics of those 1 Docket No., Non-Unanimous Stipulation and Agreement at 1 & 1 (Mar., 01). 1 Docket No., Final Order at 1 & 1 (Aug., 01). of Ralph G. Goodlet, Jr. 1 Docket No. 1

17 customers and is reasonable in view of the large proportion of the Sharyland divisions total load represented by oil and gas sales. As explained by Mr. Lain, there was not sufficient distinction between large primary oil and gas and other primary customers to justify a separate primary oil and gas class. Q. WHAT OTHER PROVISIONS RELATING TO OIL AND GAS LOADS DID THE PRIOR SETTLEMENTS IN DOCKET NOS. 0 AND CONTAIN? A. The settlement in Docket No. 0 required Sharyland Utilities to study the notion of a flat profile concept as it relates to oil and gas pumping load and provide the results of the study to the signatories to the Stipulation no later than six months before the filing of the next Cap Rock rate case but not later than December 1, Consistent with this requirement, Section II.F. of the Retail Competition Settlement in Docket No. required that Sharyland Utilities file its study of the flat profile concept as it relates to oil and gas load no later than November 0, 01, based on available load research data and to update the flat profile concept study when it files its May 01 Application. 1 Sharyland Utilities filed its flat profile interim study on November 0, 01, and in this Application has updated the study to reflect additional load research data, as set forth in the direct testimony of Mr. Hutts. Q. PLEASE DESCRIBE SHARYLAND UTILITIES BEHIND THE METER LINES COMMITMENT. A. As described in more detail by Mr. Daniel, in the four Sharyland divisions Sharyland Utilities owns and operates certain distribution lines that are on the customer s side of the meter ( Behind the Meter Lines ) as a legacy from the period when Cap Rock operated as a cooperative. Typically, a utility s service ends at the meter and the customer is responsible for ownership and maintenance of facilities behind the meter. Although Sharyland Utilities policy for extending new service today is to end its responsibility at the customer s meter (like most 1 Acquisition Settlement Order at (Jul., 0). 1 Docket No., Non-Unanimous Stipulation and Agreement at (Mar., 01). of Ralph G. Goodlet, Jr. 1 Docket No. 1

18 utilities), we have continued providing maintenance services with respect to the lines and facilities that were owned by Cap Rock prior to the time that the policy was changed for new customers. Q. HOW HAS SHARYLAND UTILITIES COMPLIED WITH ITS COMMITMENT CONCERNING BEHIND THE METER LINES? A. As required by the Retail Competition Settlement in Docket No., Sharyland Utilities continues to own, operate and maintain existing Behind the Meter Lines and has maintained maintenance records for the lines. Mr. Daniel discusses the nature of the Company s Behind the Meter Lines and its commitments concerning those lines, and Mr. Caskey provides the required maintenance information. Q. WHAT IS SHARYLAND UTILITIES COMMITMENT WITH RESPECT TO ADVANCED METERING? A. Section II.H.1. of the Retail Competition Settlement provides that Sharyland Utilities should not be required to file an advanced metering system ( AMS ) deployment plan at this time, but instead should monitor developments with respect to AMS and address the issue as to whether it should be required to deploy an AMS system in its May 01 Application. Section II.H.1. also provides that if the Commission decides to require Sharyland Utilities to deploy an AMS system in its final order in the 01 rate proceeding, Sharyland Utilities will file an application in a separate proceeding subsequent to the base-rate proceeding. Q. HAS SHARYLAND UTILITIES COMPLIED WITH THIS COMMITMENT? A. Yes. Sharyland Utilities has monitored developments with respect to AMS systems and has undertaken a preliminary feasibility analysis of deploying an AMS system for the four Sharyland divisions. At the time the Retail Competition Settlement was executed last year, we believed that adoption of an AMS system was unlikely to be economic for the four Sharyland divisions and should not be of Ralph G. Goodlet, Jr. 1 Docket No. 1

19 required at that time. Based on further analysis and continued improvements in AMS technology since then, Sharyland Utilities now believes that an AMS system would likely be economic for the four Sharyland divisions. Q. WHAT IS THE BASIS FOR YOUR CONCLUSION THAT AN AMS DEPLOYMENT PLAN COULD BE ECONOMIC IN THE FUTURE? A. For purposes of our preliminary feasibility analysis, Sharyland Utilities reviewed vendor costs for meters and communications equipment that would be necessary to implement an AMS system, and considered the potential cost savings that could be realized by deploying an AMS system. Our initial analysis suggests that implementation of an AMS system by Sharyland Utilities would result in reduced operating and maintenance expenses associated with meter reading and customer disconnects and reconnects. Also, while the rural nature of the Sharyland divisions may increase certain costs associated with AMS deployment, we anticipate that these costs would be offset by savings from the day-to-day operations and maintenance activities associated with its trucks and other equipment that are necessary to perform these tasks. Thus, the rural and dispersed nature of the Sharyland system may actually support adoption of an AMS plan. Q. ARE THERE OTHER POTENTIAL BENEFITS ASSOCIATED WITH IMPLEMENTING AN AMS SYSTEM ASIDE FROM THE COST SAVINGS? A. Yes. Aside from the cost savings, REPs have also indicated a preference for an AMS system as it allows greater access to interval data and allows for more creative cost structures. Thus, implementation of an AMS system could facilitate retail competition in the Sharyland divisions. Q. WHAT FUTURE STEPS DOES THE COMPANY PLAN TO TAKE REGARDING DEPLOYMENT OF AN AMS SYSTEM? A. Sharyland Utilities plans to file an application in a separate docket within twelve months of a final order in this proceeding to implement an AMS system for the Sharyland divisions. This period of time will allow us to conduct a full economic of Ralph G. Goodlet, Jr. 1 Docket No. 1

20 analysis and prepare a specific deployment plan tailored for the unique characteristics of the Sharyland divisions. VI. INTEGRATION OF CAP ROCK INTO SHARYLAND UTILITIES Q. PLEASE DISCUSS HOW SHARYLAND UTILITIES HAS INTEGRATED CAP ROCK INTO ITS SYSTEM. A. Mr. Caskey will explain the operational and capital investment aspects related to integration of Cap Rock into Sharyland Utilities. I will provide a brief explanation of some of the unique issues that Sharyland Utilities has had to address in connection with the integration process. In this regard, a brief description of Cap Rock s history may be helpful. Cap Rock was formed as an electric cooperative in 1, providing service to portions of West Texas. 1 In the early s, Cap Rock management began implementing a strategic growth plan that contemplated the acquisition of other utilities as well as non-utility businesses. Cap Rock combined with Lone Wolf Electric Cooperative in, with Hunt-Collin Electric Cooperative in 1, and with McCulloch Electric Cooperative in 1. Cap Rock also unsuccessfully attempted to acquire several other electric utilities and other businesses through the s and early 000s and, as a result, sustained significant financial losses. In 1, Cap Rock converted from an electric cooperative to a for-profit stockholder-owned corporation, but its rates remained unregulated by the Commission until 00, when the Legislature repealed a provision in the Public Utility Regulatory Act ( PURA ) that exempted the company from regulation after its conversion to a for-profit corporation. During the early 000s, Cap Rock was involved in a series of highly contentious proceedings with its customers related to the conversion, the transfer of its CCN to the new for-profit company, and the adoption of new rates after Cap Rock 1 This history is discussed in the PFD in Application of Cap Rock Electric Cooperative, Inc. to Transfer its Certificates of Convenience and Necessity to the Cap Rock Energy Corporation, Docket No., Proposal for Decision at - (Sep., 00). of Ralph G. Goodlet, Jr. 1 Docket No. 1

21 became subject to Commission regulation. In 00, Cap Rock was acquired by Cap Rock Holding Corporation ( CRHC ), an entity owned by Continental Energy Systems, LLC ( Continental ), a utility holding company. 0 CRHC owned Cap Rock until Sharyland Utilities acquired control in 0. Q. WHEN WAS CAP ROCK S LAST RATE CASE PROCEEDING? A. In October 00, shortly after Cap Rock became subject to Commission regulation, the Commission initiated a rate proceeding to investigate the reasonableness of Cap Rock s rates and services. Pursuant to Commission order, Cap Rock filed its Rate Filing Package in February 00 in Docket No. 1. A final order in the proceeding was issued in November 00, 1 but the tariffs were not finally approved until July 00 due to disputes concerning whether Cap Rock s proposed tariffs complied with the final order. Q. WERE THERE PROBLEMS WITH CAP ROCK S 00 RATE FILING PACKAGE? A. Yes. The administrative law judges ( ALJs ) found in Docket No. 1 that Cap Rock s Rate Filing Package was inadequate in several respects. The ALJs found that this was attributable to Cap Rock s unique history as an electric cooperative, the lack of continuous regulation by the Commission, and the fact that Cap Rock had failed to follow standard Commission accounting or recordkeeping practices. As the ALJs stated: Specifically, as is discussed in more detail throughout this PFD, the ALJs have serious concerns about the overall reliability of Cap Rock s evidence and its experts calculations. Because of Cap Rock s unusual history and existence as a cooperative, it has not been subject to continuous regulation by the Commission and, therefore, has not necessarily followed standard utility accounting 0 Application of Cap Rock Energy Corporation and Cap Rock Holding Corporation Regarding Acquisition of Stock, Docket No. 1, Final Order (May 1, 00). 1 Petition to Inquire into the Reasonableness of the Rates and Services of Cap Rock Energy Corporation, Docket No. 1, Order on Rehearing (Nov., 00). Compliance Tariff Pursuant to Final Order in PUC Docket No. 1 (Petition to Inquire into the Reasonableness of the Rates and Services of Cap Rock Energy Corporation), Docket No. 1, Notice of Approval (Jul., 00). of Ralph G. Goodlet, Jr. 1 Docket No. 1

22 procedures or kept many of its records in a manner required by the Commission s rules for regulated utilities. * * * At the hearing, the accuracy of much of the underlying financial and other data presented by Cap Rock could not be verified by any particular witness. There was no independent audit performed of Cap Rock s books and records, no Schedule S was filed by Cap Rock, and Cap Rock s financial experts all testified that they relied on the data Cap Rock presented to them and did not fully analyze it to ensure that it was reliable. At the hearing, Cap Rock did not present any company witnesses who oversaw the collection of the data and who could verify its accuracy. Throughout the hearing, the intervenors pointed out many problems with the data and with Cap Rock s past accounting and billing practices sufficient to raise serious doubts about the overall reliability of the data. Q. DID CAP ROCK S FILING IN DOCKET NO. 1 INCLUDE ADEQUATE LOAD RESEARCH DATA? A. No. One of the major problems with Cap Rock s rate filing was the lack of any reliable load research data underlying its cost-of-service study. Although the Commission s Rate Filing Package contemplates that utilities will use load research meters to develop demand data for their cost-of-service studies, Cap Rock instead utilized estimates based on data available on each circuit at most of the substations where power was received from Cap Rock s suppliers. The ALJs concluded that Cap Rock s cost-of-service study is based upon many layers of estimations and assumptions that are deduced from undefined and unverified data, and they d[id] not find the cost-of-service study to be a reliable basis for developing a reasonable rate design. Because of the lack of an adequate costof-service study, the ALJs decided to use Cap Rock s existing rate structure for applying the revenue requirement among customer classes. The ALJs indicated that the lack of reliable rate case information might under other circumstances have led them to recommend that Cap Rock s application be denied in its entirety, Docket No. 1, Proposal for Decision at - (Mar. 1, 00). Id. at. of Ralph G. Goodlet, Jr. 1 Docket No. 1

23 but since the Commission had instituted the proceeding to inquire into Cap Rock s rates, this was not a viable option. Q. WHAT CONCLUSIONS DID THE COMMISSION REACH IN CAP ROCK S LAST RATE CASE WITH RESPECT TO THE QUALITY OF MANAGEMENT OF THE COMPANY? A. The Commission concluded that Cap Rock s quality of management was poor; that the Company had sustained significant financial losses due to management s attempts to pursue acquisitions unrelated to Cap Rock s core business; that Cap Rock s executives were paid large bonuses for failed ventures during periods when the Company s financial condition was deteriorating; and that the Company had not been operated in an efficient manner. As a consequence, the Commission directed that an independent management audit of Cap Rock be undertaken by the Company. Q. HOW HAS SHARYLAND UTILITIES ADDRESSED THE PROBLEMS IDENTIFIED ABOVE? A. Mr. Caskey will provide a more detailed account of the operational changes since acquisition of Cap Rock in 0, but I will provide a brief overview of Sharyland Utilities actions to address the deficiencies found by the Commission in Cap Rock s last rate case, as well as to improve system reliability and customer service. Among other things, we determined that the accounting system that was used by Cap Rock (and that was the subject of considerable controversy in Docket No. 1) was not current and no longer supported by the vendor. Accordingly, we implemented a new accounting system for the four Sharyland divisions which became effective on January 1, 01. Sharyland Utilities has also embarked on an aggressive program to upgrade the transmission and distribution system serving the four Sharyland divisions, in order to improve reliability and safety as well as accommodate rapid growth in the oil and gas sector. As of December 1, 01, we have made capital Id. at. Docket No. 1, Order on Rehearing at 1-0 (Nov., 00). of Ralph G. Goodlet, Jr. 0 Docket No. 1

24 investments of approximately $ million to upgrade distribution infrastructure and $0 million to improve transmission facilities that have served the Sharyland divisions since acquiring Cap Rock in July 0. Additionally, we have constructed a state-of-the-art Transmission Operations Center ( TOC ) along with a Backup Control Center ( BCC ) in Amarillo that fully meets NERC and regional reliability requirements. Mr. Caskey discusses these improvements in more detail in his direct testimony. In addition to the above efforts, Sharyland Utilities has also taken steps to improve customer service and billing, establish cost controls, and increase efficiency of operations in the four Sharyland divisions. We have converted our customer service and billing system to isigma, a state-of-the-art program that substantially enhances our ability to manage customer information. The system includes a self-service customer portal that improves customer access and manages customer information more effectively. The new system has contributed to significantly increased customer service satisfaction, which scores seven points higher than the previous year and four points higher than the industry average on the 01 Customer Service Satisfaction Survey, while maintaining a high degree of accuracy (greater than percent). Q. YOU REFERRED ABOVE TO THE COMMISSION S ORDER IN DOCKET NO. 1 DIRECTING CAP ROCK TO CONDUCT AN INDEPENDENT MANAGEMENT AUDIT OF ITS OPERATIONS. HAS THAT BEEN DONE, AND IF SO, WHAT CHANGES HAVE BEEN MADE IN RESPONSE TO THE AUDIT? A. In its order approving the acquisition of Cap Rock in 00 by CRHC, the Commission directed CRHC to work with Commission Staff to issue a request for proposals for the management audit ordered in Docket No. 1. The Commission issued its request for proposals on February 1, 00, and Huron Consulting Group ( Huron ) was selected to perform the audit. The audit was completed in December 00 and set forth 1 recommendations relating to Docket No. 1, Final Order at (May 1, 00). of Ralph G. Goodlet, Jr. 1 Docket No. 1

25 executive management, affiliate transactions, financial management, customer service, electric distribution operations, and other matters. A number of these recommendations had already been implemented by July 0 when Sharyland Utilities acquired control of Cap Rock. The Acquisition Settlement approved by the Commission in Docket No. 0 required Sharyland Utilities to complete implementation of the recommendations within 1 months of the transaction s closing. The compliance report relating to the management audit recommendations in Docket No. 0 was filed on August 1, 0. Q. HAS SHARYLAND UTILITIES ADDRESSED THE PROBLEMS IDENTIFIED BY THE COMMISSION IN CAP ROCK S LAST RATE CASE RELATING TO THE PREPARATION OF A COST-OF-SERVICE STUDY? A. Yes. As noted above, one of the principal deficiencies with Cap Rock s rate case filing was the lack of load research data to develop demand data for its cost-ofservice study. To address this problem, Sharyland Utilities agreed in the Retail Competition Settlement to institute a load research program using a statistically valid sample of customer meters to collect reliable load research data for this Application. The load research meters became operational beginning in February 01 and were utilized to provide the necessary data for the cost-of-service study in this proceeding. Mr. Hutts discusses the load research program in detail in his direct testimony. Q. IS SHARYLAND UTILITIES CONTINUING TO INTEGRATE THE FORMER CAP ROCK DIVISIONS INTO ITS SYSTEM AND TO IMPROVE SERVICE AND INCREASE EFFICIENCY? A. Yes. It has been a major undertaking to integrate Cap Rock into the Sharyland Utilities system and to improve reliability, operations, and customer service since the acquisition of Cap Rock in 0, especially in light of the extremely rapid growth in the West Texas service area attributable to the oil and gas sector. Although substantial progress has been made, we plan to continue our ongoing efforts to upgrade service and reliability for the Sharyland Utilities system. of Ralph G. Goodlet, Jr. Docket No. 1

26 VII. SHARYLAND UTILITIES RATE FILING PACKAGE Q. HAS SHARYLAND UTILITIES RATE FILING PACKAGE BEEN PREPARED IN A MANNER CONSISTENT WITH THE COMMISSION S REGULATIONS? A. Yes. Sharyland Utilities has utilized the Commission s Investor-Owned Utility Transmission and Distribution Cost-of-Service Rate Filing Package to prepare its filing in a manner consistent with the Commission s regulations and the Commission s instructions to the RFP. Q. ARE THERE ANY SCHEDULES THAT SHARYLAND UTILITIES WAS UNABLE TO COMPLETE? A. Yes. There are several schedules in the Commission s RFP that require that the utility provide three years of historical data by function. The Commission s RFP was developed for unbundled transmission and distribution utilities, not bundled utilities, and therefore assumes that the utility has already unbundled its services and has unbundled cost data available for the preceding three years. Although Sharyland Utilities has collected the data necessary to comply with this requirement for its historic Test Year, data is not available on a functionalized basis for prior years during which the four Sharyland divisions were operated on a bundled basis. Paragraph 1 of the General Instructions to the RFP recognizes that such information may not be available and states that [a] TDU s rate filing package will not be considered deficient if years of actual historical data does not exist at the time a RFP is filed. The Retail Competition Settlement provided that Sharyland Utilities would provide functionalized data for the Test Year, but would not be required to provide functionalized data for the following specific rate schedules because of the unavailability of such data: Schedules D-., D-., D-., D-., and D-.. In preparing this Application, Sharyland Utilities discovered that there were two other schedules that require historic functionalized data Schedules E-.1 and E-. that also call for three years of functionalized data. Since the General Instructions to the RFP provide that a utility need not submit historic functionalized data if it is not available, we believe that a waiver is of Ralph G. Goodlet, Jr. Docket No. 1

27 not necessary with respect to these additional schedules. To the extent that the Commission determines otherwise, Sharyland Utilities requests such a waiver on the ground that historic functionalized data is not available because the four Sharyland divisions have been operated on a bundled basis for the prior three years. Q. IS SHARYLAND UTILITIES REQUESTING ANY OTHER WAIVERS TO THE COMMISSION S RFP? A. No. Q. PLEASE EXPLAIN HOW THE RFP REFLECTS THE RESTRUCTURING PLAN FOR SHARYLAND UTILITIES APPROVED BY THE COMMISSION IN DOCKET NO.. A. As discussed above, the Commission authorized Sharyland Utilities to transfer its ownership interest in its transmission and distribution assets to SDTS and SDTS FERC in Docket Nos. and 0. The final orders in those proceedings also addressed how rates would be calculated for Sharyland Utilities under the structure approved in those orders. Specifically, paragraph 1.b of the order in Docket No. requires Sharyland Utilities wholesale and retail rates will be determined using the same methodology that would have been utilized if the restructuring had not occurred. In order to accomplish this, rates are set on a combined basis for Sharyland Utilities and the ownership entities (SDTS and SDTS FERC), using the audited books and records of Sharyland Utilities, SDTS, and SDTS FERC. In addition, as part of its rate filing package, Sharyland Utilities is required to file workpapers showing how the rate filing schedules were prepared on a combined basis. Docket No., Final Order at (Jul. 1, 00). of Ralph G. Goodlet, Jr. Docket No. 1