STATE OF ILLINOIS
ILLINOIS COMMERCE COMMISSION
Northern Illinois Gas Company
d/b/a Nicor Gas Company
Proposed general increase in rates, and
revisions to other terms and conditions
of service
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No. 08-XXXX
Direct Testimony of
GARY R. BARTLETT
Vice President, Supply Operations
Nicor Gas Company
April 29, 2008
Nicor Gas Ex. 4.0
TABLE OF CONTENT
Page
I.
II.
III.
IV.
V.
Background and Qualifications........................................................................................... 1
Storage Operations & Assets .............................................................................................. 4
A.
Stored Gas............................................................................................................... 5
B.
Balances for Storage and Processing Plant............................................................. 7
C.
Certain Discrete Capital Additions (Part 285) ........................................................ 8
D.
Storage Operating Expenses ................................................................................. 12
Company Use Gas............................................................................................................. 13
Proposed Riders for Company Use Gas............................................................................ 17
Proposed Tariff Revisions Affecting Transportation Customers...................................... 18
Nicor Gas Ex. 4.0
1
Q.
Please state your name and business address.
2
A.
Gary R. Bartlett, 1844 Ferry Road, Naperville Illinois 60563.
3
Q.
By whom are you employed and in what position?
4
A.
I am the Vice President, Supply Operations for Northern Illinois Gas Company d/b/a
5
Nicor Gas Company (“Nicor Gas” or the “Company”).
6
I.
BACKGROUND AND QUALIFICATIONS
7
Q.
Please describe your duties as Vice President, Supply Operations.
8
A.
I have executive responsibility for all gas supply operations at Nicor Gas. The functions
9
under my management include planning Nicor Gas’ gas supply portfolio, purchasing gas
10
for sales to customers and for Company use, gas control including dispatching gas for
11
transportation or sale, and overseeing Nicor Gas’ storage assets and the operation of its
12
storage fields as well as all of its transmission facilities. I am also involved in the
13
evaluation and utilization of risk management tools to mitigate Nicor Gas’ exposure to
14
gas price risks inherent in the natural gas market.
15
Q.
Please summarize your educational background and work experience.
16
A.
I received my Bachelors Degree in Electrical Engineering from the University of
17
Missouri-Rolla in 1971. In 1981, I received a Masters of Business Administration from
18
the University of Chicago. I am a registered Professional Engineer in the State of
19
Illinois.
20
Prior to becoming Vice President, Supply Operations, for Nicor Gas, I served as
21
Vice President, Technology for EN Engineering, L.L.C., a joint venture between Nicor
22
Inc. and A. Epstein & Sons, International. In that position, I was the lead executive for
Nicor Gas Ex. 4.0
23
the technology business unit, accountable for all of its activities, including engineering,
24
design, project management, procurement, and business development relating to
25
industrial piping systems, pipeline integrity, corrosion control, and combined heat and
26
power projects.
27
Prior to that, I served as Executive Vice President, Resource Management, for
28
MidCon Corp. (“MidCon”), a national energy company whose assets included interstate
29
pipelines, and as Executive Vice President and Chief Operating Officer for Natural Gas
30
Pipeline Company of America, a MidCon affiliate and major interstate natural gas
31
pipeline that, inter alia, interconnects Nicor Gas’ system with various production fields
32
and other sources and users of natural gas.
33
Preceding those assignments, I was Senior Vice President, Product / Performance
34
Management; Vice President, Gas Supply; and Vice President, Planning, for MidCon. In
35
the course of my 37-year career in the natural gas industry, I have also held a variety of
36
lower-level executive, management, and engineering positions, principally dealing with
37
gas supply acquisition, gas supply operations, gas transportation, planning, system
38
design, and construction management of numerous pipeline and storage facilities.
39
Q.
40
41
Have you testified before the Illinois Commerce Commission (“Commission”)
previously?
A.
Yes. I testified in Nicor Gas’ last rate case, Docket No. 04-0779 (“2004 Rate Case”). I
42
also provided testimony in Nicor Gas’ last four gas supply cost reconciliation cases
43
(Docket Nos. 04-0681, 05-0747, 06-0750 and 07-0575).
2
Nicor Gas Ex. 4.0
44
Q.
What are the purposes of your direct testimony?
45
A.
In general, I will address issues relating to Nicor Gas’ storage and supply operations and
46
that the investments made and costs incurred were prudent and at reasonable cost. In
47
particular, the purposes of my direct testimony are to:
48
49
•
Explain the contribution of stored gas to Nicor Gas’ rate base and revenue
requirement;
50
51
•
Identify and describe significant investments in new storage assets not included in
the Company’s current rate base;
52
53
•
Describe Nicor Gas’ practices for the acquisition of Company Use Gas and its
forecast for test year gas required for Company use;
54
55
•
Provide support for the Company’s proposed alternative rate design mechanisms
as they relate to Company Use Gas;
56
57
•
Describe Nicor Gas’ storage operations, including the use of its storage assets in
providing various services to its customers; and
58
59
•
Identify and describe proposed tariff revisions affecting end-use Transportation
customers and explain why the Commission should approve them.
60
Q.
Are there any Exhibits attached to your testimony?
61
A.
Yes.
62
63
64
•
Nicor Gas Exhibit 4.1 identifies the eight Company-owned storage fields and their
inventory levels and is referenced in the portion of my testimony regarding the
contribution of stored gas to Nicor Gas’ rate base and revenue requirement.
65
66
67
68
•
Nicor Gas Exhibit 4.2 graphically displays historical end-use Transportation
Customer on-system storage activity and is referenced in the portion of my
testimony regarding the Company’s proposed tariff changes affecting
Transportation Customers.
3
Nicor Gas Ex. 4.0
69
II.
STORAGE OPERATIONS & ASSETS
70
Q.
Please summarize this portion of your testimony.
71
A.
This section of my testimony supports and quantifies the amount of stored gas that the
72
Company is including in rate base along with the inclusion in Nicor Gas’ rate base of the
73
Company’s other gas storage assets. I will also support the inclusion in Nicor Gas’
74
revenue requirement of the operating expenses related to the Company’s storage
75
operations.
76
Q.
77
78
Before turning to the specific issues you summarized above, please describe briefly
the storage assets held by Nicor Gas.
A.
Nicor Gas stores gas in its eight Company-owned underground gas storage reservoirs
79
(“on-system storage”) and under contracted storage services from interstate pipelines
80
under FERC-approved tariffs. Nicor Gas’ natural gas supply inventories are maintained
81
to meet multiple objectives: to provide supplies required to meet seasonal demand, to
82
ensure peak demand can be met, to provide supply flexibility and to enhance the
83
reliability of deliveries. The utilization of storage offers the additional benefit of being
84
able to purchase a significant portion of winter supply requirements during the summer
85
period when prices are typically lower.
86
Q.
87
88
89
Can you please provide a description of the gas supply inventories to which you just
referred?
A.
From a storage operations perspective, the gas inventory held in storage falls into two
main categories: (1) base gas, which remains unchanged throughout the year, and
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Nicor Gas Ex. 4.0
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(2) working gas, which represents the gas that is cycled in and out of the reservoir over an
91
annual cycle.
92
Base gas consists of both recoverable base gas and non-recoverable base gas.
93
Recoverable base gas consists of those volumes which could be economically withdrawn
94
over a period of time if operations of a storage field were halted and it was abandoned,
95
but which cannot typically be withdrawn during a normal injection/withdrawal cycle.
96
Non-recoverable base gas consists of those volumes which cannot be economically
97
recovered, as well as those volumes that become permanently entrapped within the
98
reservoir and cannot be recovered, even after normal operations of a field have been
99
halted and it has been abandoned. The total amount of base gas, including both
100
recoverable and non-recoverable base gas, acts as a cushion, providing the pressure
101
support needed within the reservoirs, to allow for withdrawal of the working gas
102
inventories.
103
In addition, the gas inventories held by the Company under contracted storage
104
services, that is storage services supplied by pipelines, are all working gas inventories.
105
Any base gas required by the pipeline in the operations of their storage fields is provided
106
by the pipeline.
107
A.
STORED GAS
108
Q.
What is the level of base gas that is included in the Company’s rate base?
109
A.
As shown in Nicor Gas Exhibit 4.1, the total amount of base gas included in rate base is
110
316.5 Bcf. This volume includes 242.8 Bcf of non-recoverable base gas and 73.7 Bcf of
111
recoverable base gas.
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Nicor Gas Ex. 4.0
112
Q.
How is the level of base gas on Nicor Gas Exhibit 4.1 verified?
113
A.
The Storage group that reports to me conducts an internal inventory analysis annually,
114
along with continuous monitoring of the hydrology and behavior of the Company’s
115
storage assets. These analyses continue to confirm that the level of base gas reflected is
116
correct. Further, in 2004, an independent reservoir consultant, James W. Fairchild,
117
President of Fairchild and Wells, Inc. conducted a study that analyzed the top to base
118
ratio. Fairchild and Wells, Inc. is an experienced petroleum engineering consulting firm
119
that has conducted similar analysis of the Company’s assets in the past. The results of
120
that study also concluded that the base gas volumes shown on Nicor Gas Exhibit 4.1 were
121
appropriate and were adopted by the Commission in the Company’s 2004 Rate Case.
122
Finally, Fairchild and Wells, Inc. has recently conducted a review of the Company’s
123
2006-2007 Inventory Verification Studies and provided an opinion that the volumes
124
reflected were appropriate within reasonable engineering accuracy.
125
Q.
126
127
What is the working gas level of inventory in the eight Company-owned on-system
storage fields and how do you know the level is accurate?
A.
As shown in Nicor Gas Exhibit 4.1, the level of working gas targeted for the on-system
128
storage fields is 134.6 Bcf. The target of 134.6 Bcf is an optimal level of storage
129
inventory that supports daily and seasonal supply levels, peak day deliverability
130
requirements and seasonal cycling targets. This non-coincidental inventory level has
131
been targeted and has proven to be very beneficial in maintaining good reservoir
132
performance. Such performance is achieved by allowing the storage fields to reach lower
133
inventory levels at the end of the withdrawal season through increased cycling while
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Nicor Gas Ex. 4.0
134
maintaining reservoir pressures at sufficient levels to ensure peaking requirements can be
135
met.
136
Q.
What is the working gas inventory level that is utilized in forecasting the Gas in
137
Storage component in the Company’s proposed rate base as mentioned in the direct
138
testimony of Nicor Gas witness James M. Gorenz? (Nicor Gas Ex. 11.0).
139
A.
A total of 134.6 Bcf of working gas inventory is targeted for the on-system storage fields
140
by the beginning of the withdrawal season, which is comprised of both Company owned
141
gas and third party inventories. Of that total, 80.9 Bcf is utilized in forecasting the Gas in
142
Storage component in the Company’s proposed rate base. The 80.9 Bcf is derived by
143
subtracting forecasted third party on-system storage inventory at the beginning of the
144
withdrawal season from the 134.6 Bcf of total working gas. In addition to the 80.9 Bcf,
145
the Gas in Storage component in the Company’s proposed rate base also includes a
146
working gas inventory of 37.3 Bcf stored under the contracted storage services from
147
interstate pipelines mentioned earlier in my testimony. Therefore, the total amount of
148
working gas inventory that is utilized in determining the Gas in Storage component in the
149
Company’s proposed rate base is 118.2 Bcf. The forecasted injection and withdrawal
150
activity around the 118.2 Bcf is identified in Schedule F-9, which is filed as part of the
151
Company’s Part 285 submission related to this proceeding.
152
B.
153
154
Q.
BALANCES FOR STORAGE AND PROCESSING PLANT
Have you reached a conclusion concerning the inclusion in the Company’s proposed
rate base of the forecast test year balances for Storage and Processing Plant?
7
Nicor Gas Ex. 4.0
155
A.
Yes. I have reviewed the forecast test year balances for Storage and Processing Plant
156
assets included in the Company’s proposed rate base, and I am familiar with that plant,
157
and with the requirements for, and uses of, such plant. The departments that report to me
158
participated in the development and review of the forecast. I have reached such a
159
conclusion based on that information and my experience.
160
Q.
161
162
What is your conclusion concerning the inclusion in the Company’s rate base of the
forecast end of test year balances for Storage and Processing Plant?
A.
The forecast end of test year balances for Storage and Processing Plant represent assets
163
that the Company will use in the provision of utility services to its customers and that are
164
useful in the provision of those services. Many of those assets were in service at the time
165
of the Company’s 2004 Rate Case, were found to be reasonable and prudent and were
166
already included by the Commission in the Company’s current rates. The assets acquired
167
since 2005 have been or will be, in my opinion, acquired prudently and at a reasonable
168
cost.
169
C.
170
Q.
CERTAIN DISCRETE CAPITAL ADDITIONS (PART 285)
Please refer to Nicor Gas Exhibit 3.1 attached to the testimony of Nicor Gas witness
171
Rocco J. D’Alessandro. (Nicor Gas Ex. 3.0). Do any of the identified capital
172
addition projects relate to storage operations?
173
A.
Yes. Several additions relate to storage operations. The “Gas Storage Improvement -
174
Compressor Replacements” project (Line No. 2), the “Air Emission Compliance Project
175
– Retrofit Engine Compressor Units – Phase 1” project (Line No. 7), the “Air Emission
176
Compliance Project – Retrofit Engine Compressor Units – Phase 2” project (Line
8
Nicor Gas Ex. 4.0
177
No. 10), and “Air Emission Compliance Project – Retrofit Engine Compressor Units –
178
Phase 3” project (Line No. 11) are storage assets. For ease of reference, I will refer to
179
these projects, respectively, as “Compressor Project”, “Air Emission Project – Phase 1”,
180
“Air Emission Project – Phase 2”, and “Air Emission Project – Phase 3”. These projects
181
are new and in addition to costs identified and approved for inclusion in rate base in the
182
2004 Rate Case.
183
Q.
Please describe the Compressor Project referenced at Line Number 2.
184
A.
This project involves the replacement of two of Nicor Gas’ Orenda/Delaval 9,900 HP
185
turbine compressor units at the Troy Grove storage field with new turbine units, expected
186
to be referred to as Solar units #28 and #29. The new compressor units will replace
187
Orenda units that have been in service since 1964 and are considered to be at the end of
188
their service life. The new compressors will be placed in service in 2009 and will be used
189
and useful in the provision of gas utility services to Nicor Gas’ customers commencing in
190
November 2009, in order to provide service for the 2009/2010 heating season, and
191
thereafter.
192
Q.
193
194
Please describe the basis on which the Compressor Project was undertaken by Nicor
Gas and how the Company made the decision to pursue this project.
A.
The Company elected to proceed with the Compressor Project because of the need to
195
ensure the availability of reliable mechanical compression capability at the Troy Grove
196
field. The Troy Grove storage field requires mechanical compression to function
197
effectively during portions of the withdrawal season and to support its peak day
198
deliverability of 1.05 Bcf, which represents about 40% of the Company’s total peak day
199
storage deliverability and over 20% of total system peak day demand. The Orenda
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Nicor Gas Ex. 4.0
200
compressors that are being replaced provide over 35% of the horsepower required to
201
meet Troy Grove’s peak day deliveries. The compression provided by the Orenda
202
compressors is a highly critical link in the overall reliability of Troy Grove. However,
203
the Orenda compressors are becoming difficult and impractical to maintain and have
204
reached the end of their useful lives.
205
Q.
How will the assets included in the Compressor Project be used and useful?
206
A.
The assets included in the Compressor Project will provide required mechanical
207
compression at the Troy Grove field. They will permit the field’s continued reliable
208
operation at its designed daily injection and withdrawal capacity, and will be used to
209
maintain the field’s important contribution to peak day deliverability. The assets will be
210
used to support service to Nicor Gas’ sales and transportation customers consistently
211
throughout the annual storage cycle, and will not only be useful, but essential, in the
212
reliable provision of that service.
213
Q.
Will the assets included in the Compressor Project be used and useful in 2009?
214
A.
Yes. The order for the compressor units has already been placed, with delivery scheduled
215
between June and July 2009. The new units will be placed into service by November
216
2009 so that they are available for the 2009/2010 heating season.
217
Q.
218
219
220
Will the assets included in the Compressor Project be acquired and placed into
service prudently, and at reasonable costs?
A.
Yes. This project, with a forecasted total cost of $25.5 million, including overhead costs,
is reasonable and prudent.
10
Nicor Gas Ex. 4.0
221
Q.
Please describe the Air Emission Project – Phase 1 referenced at Line Number 7 of
222
Nicor Gas’ Schedule F-4, and why the assets installed should be included in rate
223
base.
224
A.
During 2006, the Company embarked on a multi-year program to retrofit existing
225
reciprocating engines at its storage facilities in order to bring them into compliance with
226
nitrogen oxide (“NOx”) emission reduction regulations being promulgated by the Illinois
227
Environmental Protection Agency (“IEPA”) in conjunction with USEPA requirements.
228
The Phase I Project, which was initiated in 2006 and completed in May 2007, covered the
229
installation of pre-combustion technology on four 4,000 hp compressor units at the
230
Company’s Hudson and Lexington storage facilities. The $6.0 million total cost,
231
including overheads, was reasonable for the equipment installed, and the installation of
232
the emission control equipment to achieve the targeted reduction in NOx emissions was
233
prudent.
234
Q.
Please describe the Air Emission Project – Phase 2 and the Air Emission Project –
235
Phase 3 referenced at Line Numbers 10 and 11, respectively, of Nicor Gas’
236
Schedule F-4, and why the assets installed should be included in rate base.
237
A.
The second and third phases of the Air Emission Projects are a continuation of the multi-
238
year program discussed previously. Phase 2 covered the retrofitting of four additional
239
units starting in the fall of 2007 with completion in May 2008. The forecasted cost of
240
Phase 2 is $3.9 million including overhead costs. Phase 3 involves retrofitting the
241
remaining four units requiring modification with work commencing in the fall of 2008
242
and completion set for May 2009. The projected cost of Phase 3 is $3.8 million,
243
including overhead costs.
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Nicor Gas Ex. 4.0
244
The storage compressor units modified under both Phase 1 and Phase 2 are used
245
in the provision of utility service to customers and are used and useful in that function.
246
The compressor units being modified under Phase 3 will be used in the provision of
247
utility service to customers and will be used and useful in that function during the test
248
year. The forecasted cost, including overheads, is reasonable and prudent.
249
Q.
250
251
Discrete Additions?
A.
252
253
Does this complete your direct testimony regarding Storage Assets and Certain
Yes.
D.
Q.
STORAGE OPERATING EXPENSES
Have you reached a conclusion concerning the inclusion in the Company’s proposed
254
revenue requirement of the forecast test year operating expenses associated with the
255
Company’s storage operations?
256
A.
Yes. I have reviewed the forecast test year operating expenses relating to the storage
257
function included in the Company’s proposed revenue requirement. I am familiar with
258
the operation and requirements of the Company’s storage function, and the departments
259
that report to me participated in the development and review of that forecast. I have
260
reached such a conclusion based on that information and my experience.
261
Q.
262
263
Please describe Nicor Gas’ test year Underground Storage Operation and
Maintenance expenses.
A.
Nicor Gas’ test year Underground Storage Operation and Maintenance (“O&M”)
264
expenses are projected to be $32,789,000. Underground Storage Operation expenses
265
include operation supervision and engineering, wells, lines, compressor stations,
12
Nicor Gas Ex. 4.0
266
compressor station fuel and power, measuring and regulating stations, purification related
267
expenses, gas losses and rent. The total Underground Storage Operation expense forecast
268
for the test year is $28,550,000. Underground Storage Maintenance expenses include
269
maintenance supervision and engineering, structures and improvements, reservoirs and
270
wells, lines, compressor station equipment, purification equipment, and other equipment.
271
The total Underground Storage Maintenance expense forecast for the test year is
272
$4,239,000.
273
Q.
What is your conclusion concerning the inclusion in the Company’s proposed
274
revenue requirement of the forecast test year O&M expenses associated with the
275
Company’s storage operations?
276
A.
The forecast test year O&M expenses associated with the Company’s storage operations
277
reflect the costs of providing storage services to the Company’s customers. The forecast
278
test year O&M expenses associated with the Company’s storage operations are
279
reasonable in light of the services offered, and reflect activities and costs that will be
280
prudently incurred.
281
III.
COMPANY USE GAS
282
Q.
Please summarize the matters you will address in this portion of your testimony.
283
A.
I will describe the process of gas acquisition for Company purposes, also known as
284
“Company Use Gas,” and support the forecasted expenses included in the Company’s
285
revenue requirement calculation.
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Nicor Gas Ex. 4.0
286
Q.
What is meant by the term “Company Use Gas?”
287
A.
“Company Use Gas” refers to gas purchases which are made, not for resale to retail
288
customers but rather, more specifically, to satisfy franchise delivery requirements and for
289
the Company’s own operational and other requirements. Company Use Gas includes gas
290
purchased by the Company for four different purposes: (1) Franchise gas; (2) Compressor
291
fuel; (3) Company facilities gas; and (4) Storage field operations requirements. Franchise
292
gas is the gas supply which the Company is responsible for purchasing and providing to
293
the communities in which it operates as a condition for the Company to operate within
294
those municipalities. Compressor fuel is fuel gas used in the operation of the Company’s
295
compressors at its storage stations. Company facilities gas is gas consumed in the
296
buildings or facility locations owned or leased by the Company for heating and day to
297
day operations. Storage field operations requirements represent the volumes of gas
298
related to the sales customers’ portion of the 2% storage withdrawal factor, which
299
accounts for the gas utilized in operating the storage fields (other than compressor fuel).
300
These four components collectively represent Company Use Gas.
301
Q.
How is the cost of Company Use Gas recovered?
302
A.
The cost of Company Use Gas is an operating expense. The Franchise gas portion of
303
Company Use Gas is recovered under Rider 2 of the Company’s tariffs, as discussed in
304
the direct testimony of Nicor Gas witness Robert R. Mudra (Nicor Gas Ex. 14.0), and the
305
remainder is recovered through base rates. The costs are established using forecasted test
306
year expenses.
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Nicor Gas Ex. 4.0
307
Q.
How does Nicor Gas acquire Company Use Gas?
308
A.
The Company has contracted with an unaffiliated wholesale gas supplier for the purchase
309
of Company Use Gas. The Company is treated as if it were an end use transportation
310
customer with an allocation of storage like that of any other analogous customer. The gas
311
supplier is assigned access to allocated storage to facilitate management of its obligations
312
to meet Company Use Gas delivery requirements. In an effort to protect itself from
313
volatility in operating costs, the Company may fix the prices on some portion of required
314
supplies in advance, by securing fixed prices from its supplier and/or through the use of
315
financial hedges.
316
Q.
317
318
Does the current gas acquisition program provide a prudent and adequate means
for acquiring Company Use Gas?
A.
Yes. This gas acquisition program provides a prudent means for acquiring Company Use
319
Gas at market prices and attempts to help mitigate some of the impact of extreme
320
volatility of gas prices within a year.
321
Q.
How is the cost forecast developed?
322
A.
The Company forecast is based on individual volume forecasts for each of the four
323
components of Company Use Gas. The volume forecasts are based on: (1) forecasted
324
municipal franchise use under normal weather, which takes into consideration the
325
municipal rights as well as their historical usage; (2) forecasted compressor fuel based on
326
expected compression required to cycle the forecasted storage volumes; (3) forecasted
327
use at Company facilities based on normal weather and historical use; and (4) forecasted
15
Nicor Gas Ex. 4.0
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storage field operations requirements expected to result from cycling the sales customers’
329
portion of total withdrawals of gas in storage.
330
Expenses for Company Use Gas are then calculated for this estimated volume by
331
applying (1) forecasted gas prices for the test year to those forecasted volumes that have
332
not been hedged, and (2) prices of existing hedges in effect for the test year to those
333
volumes that have already been hedged.
334
Q.
335
336
What is your forecast for the quantity and cost of Company Use Gas for the test
year?
A.
The Company’s test year forecast reflects the acquisition of approximately 4 Bcf of gas at
337
a total cost of $34,321,000 (which includes .86 Bcf for Franchise gas at a cost of
338
$7.5 million).
339
Q.
How were the forecasted gas prices for the test year determined?
340
A.
The Company used the average of the closing prices over a three day period
341
(December 31, 2007, January 2, 2008 and January 3, 2008) for each of the months of the
342
test year, as listed on the New York Mercantile Exchange (“NYMEX”). The Company
343
used the same prices in developing its forecasts for the 2009 test year.
344
Q.
345
346
Have you reached a conclusion concerning the inclusion in the Company’s proposed
revenue requirement for the forecast test year expenses for Company Use Gas?
A.
Yes. I have reviewed the forecast test year expenses relating to Company Use Gas. The
347
departments that report to me participated in the development and review of the forecast.
348
Based on that information and my experience, I have concluded that the forecasted test
349
year expenses for Company Use Gas represent expenses that are reasonable and prudent.
16
Nicor Gas Ex. 4.0
350
IV.
PROPOSED RIDERS FOR COMPANY USE GAS
351
Q.
Are you familiar with the proposed changes to Rider 2 and the proposed Rider 27
352
353
(Rider CUA – Company Use Gas Cost Adjustment)?
A.
Yes. In summary form, these proposals would establish a means of tracking Company
354
Use Gas expenses. Rider 27 is proposed and supported in the direct testimony of Nicor
355
Gas witness Gerald P. O’Connor and the changes to Rider 2 are covered in the testimony
356
of Mr. Mudra. (Nicor Gas Exs. 12.0 and 14.0, respectively).
357
Q.
358
359
Please explain the nature of these costs that makes the use of a cost recovery rider
appropriate.
A.
These costs are a function of the volume requirements and the price that has to be paid to
360
secure such volumes. The price of the natural gas has been and continues to be very
361
volatile and is outside the control and influence of the Company. The price of natural gas
362
in the United States is set in a highly competitive market that reflects the market’s
363
perception of supply and demand fundamentals. While I am not an economist, it is my
364
experience that the price of natural gas is influenced today by fundamental market
365
changes in both the long and short run. The tightening of the supply and demand balance
366
and the small but increasing use of imported gas supplies has resulted in what are, in my
367
opinion, high gas prices relative to historical norms. The overall market’s expectations
368
regarding future gas prices are reflected in the NYMEX futures prices. The level and
369
volatility of gas prices as reflected by the NYMEX is show in Figure 1 below.
17
Nicor Gas Ex. 4.0
370
Figure 1: Daily Nymex Strip Prices
Daily Nymex Settlement Prices
$11
$10
$9
($/MMBtu)
2007 Futures
(A g)
2008 Futures
(A )
$8
$7
2009 Futures (Avg)
$6
371
372
373
V.
PROPOSED TARIFF REVISIONS AFFECTING TRANSPORTATION
CUSTOMERS
374
Q.
Are you familiar with the Transportation tariff changes the Company is proposing?
375
A.
Yes. As discussed in Mr. Mudra’s direct testimony (Nicor Gas Ex. 14.0), the Company is
376
proposing changes to the Storage Banking Service (“SBS”) provisions in its tariffs for
377
Transportation customers, including Rates 74, 75, 76 and 77 and through Rider 25,
378
Rates 4, 5, 6 and 7.
379
Q.
What is the purpose of your testimony regarding the proposed tariff changes?
380
A.
The Company’s proposed tariff changes seek to positively impact Nicor Gas’ ability to
381
manage its storage fields and to reduce the need for Nicor Gas to periodically impose
382
restrictions on deliveries to Nicor Gas’ system (commonly referred to as issuing pipeline
18
Nicor Gas Ex. 4.0
3/3/08
1/3/08
9/3/07
7/3/07
5/3/07
3/3/07
1/3/07
11/3/07
Trade Date
11/3/06
9/3/06
7/3/06
5/3/06
3/3/06
1/3/06
11/3/05
9/3/05
7/3/05
5/3/05
3/3/05
1/3/05
$5
383
“caps”) in certain months. My testimony provides support for the proposed tariff changes
384
and discusses the operational issues associated with the proposed tariff changes.
385
Q.
Please describe Nicor Gas’ storage operations.
386
A.
As mentioned previously, Nicor Gas operates eight underground natural gas storage
387
reservoirs which Nicor Gas uses to provide peaking, supply flexibility, reliability of
388
deliveries, and to capture the price benefits of purchasing a portion of winter supply
389
requirements during the summer when prices are typically lower.
390
Nicor Gas’ eight storage fields are underground aquifer reservoirs. An aquifer
391
reservoir is a naturally occurring underground formation that consists of water-filled,
392
porous sandstone layers covered by a solid dome-shaped caprock. When gas is injected
393
into the storage reservoir, water is displaced by the gas from the pores of the sandstone
394
structure, and the pressure in the reservoir rises to levels greater than the reservoir’s
395
original pressure. The displaced water provides pressure needed for Nicor Gas to
396
withdraw the gas later.
397
The Company’s eight storage fields are referenced on Nicor Gas Exhibit 4.1. The
398
fields vary in size and deliverability. All eight storage fields contribute to providing
399
seasonal supply, system balancing, and peak day deliverability. Seasonally, these on-
400
system storage fields provide approximately 40% of winter demand and approximately
401
50%, or 2.5 Bcf, of the Company’s total system design day demand of 4.9 Bcf.
402
Because these storage fields are aquifer reservoirs, Nicor Gas strives to operate
403
them in a controlled manner in order to maintain optimal field performance, which is
404
necessary to ensure the deliverability from each field required to satisfy peak day and
19
Nicor Gas Ex. 4.0
405
seasonal needs is maintained. Failing to operate in this manner jeopardizes the ongoing
406
operational integrity of the fields. For example, if the fields are left shut in (neither on
407
injection or withdrawal) for extended periods of time, the “energy” within the reservoir
408
will diminish thus reducing withdrawal capabilities, and a portion of the gas will
409
eventually become ineffective and non-recoverable. As another example, sustained
410
withdrawals or injections in excess of optimal rates will also result in a degradation of
411
field performance. The Company’s storage fields do not have a static, fixed level of
412
deliverability. However, the ability of a storage field to store and deliver gas can be
413
enhanced or harmed within a season and from year-to-year by the manner in which the
414
field is used. I liken it to a nickel-cadmium battery that many people have become
415
familiar with and use in their electronics and small appliances. If the battery is only
416
partially discharged and then recharged before its next use, its ability to be recharged to
417
its full potential in the future is compromised. Similarly, the best way to preserve its
418
capacity is to wait to begin the recharging process until whatever charge the battery
419
currently holds is fully discharged. So the best way to use and recharge such a battery is
420
first, to make sure it is fully charged, then second, to use the battery and not begin
421
recharging until it is fully spent.
422
The analogy can be applied to the Company’s storage fields though their
423
operation is more complex. In order to maintain the performance of a field, our engineers
424
create an optimal operational plan which calls for the fields to be filled and then emptied
425
on a seasonal schedule. We aim to fill the field during the summer (low demand) season
426
to the optimal level just prior to the beginning of the winter (high demand) heating
427
season, and to nearly empty it by the end of the winter season. The plan is designed to
20
Nicor Gas Ex. 4.0
428
ensure maximum deliverability is available on January 20, the Company’s design day, or
429
highest demand day, as well as satisfying subsequent deliverability targets over the
430
remainder of the heating season, while also providing for the cycling of as much gas as
431
possible. This plan has some flexibility on the margins, so that on any given day we are
432
not rigidly required to fill or withdraw a precise amount. However, each deviation from
433
the plan, such as injections into storage during the winter caused, for example, by lower
434
weather related demand or economic decisions by third-party storage customers, has an
435
impact on the storage plan for the balance of the season. Repeated deviations will have
436
an adverse cumulative impact on storage operations for the balance of the season and
437
potentially over the next several seasons.
438
Q.
439
440
Has the Company faced any issues with operating its storage fields in the manner
required and described above?
A.
Yes. Transportation customers access and utilize storage through an elected SBS that is
441
offered by the Company. This service currently affords such customers significant levels
442
of daily and monthly flexibility in the management of their allocated storage capacity.
443
As described later in my testimony, their storage utilization has often been counter to the
444
operational requirements of the Company’s storage fields.
445
Q.
446
447
What is the Storage Banking Service that is available to end-use Transportation
customers?
A.
Nicor Gas’ SBS is a service offered to Transportation customers which allows them to
448
serve all or part of their demands from supplies of gas that they have stored in the
449
Company’s storage fields. In addition, where such customers’ deliveries in a day exceed
450
demand, they may store the excess with Nicor Gas. These balancing storage rights
21
Nicor Gas Ex. 4.0
451
include both the allocation of storage capacity and daily deliverability associated with
452
such capacity in accordance with individual customer rights. On an annual basis, SBS
453
rights are made available to transportation customers as a class. Each eligible customer
454
then has the right to elect for that annual period an amount of SBS that it wishes to take
455
up to a calculated guaranteed amount and has an opportunity to elect additional SBS if all
456
the available capacity has not been selected by other customers. Most recently, the total
457
volume of SBS capacity available to Transportation customers has been about 35 Bcf.
458
Q.
What are the current SBS quantity limitations applicable to users of SBS?
459
A.
As I testified above, Nicor Gas customers who take transportation services are permitted,
460
as part of the terms of their service, to use defined amounts of Nicor Gas’ on-system
461
storage assets by subscribing to SBS. Currently, such customers are entitled to a storage
462
capacity of up to 28 times their Maximum Daily Contract Quantity (“MDCQ”), i.e., the
463
maximum amount of gas that the customer requires the Company to deliver on a given
464
day. This is also described as 28 “days” of storage capacity. No change to the number of
465
days of storage capacity is being proposed in this case.
466
Nicor Gas’ tariff also applies withdrawal limitations on a Critical Day which, as
467
defined in the Terms and Conditions section of the tariff, can be declared for various
468
reasons to ensure the Company is able to fulfill its firm contractual obligations and
469
maintain the overall operational integrity of its system. Storage withdrawals on a Critical
470
Day are currently limited to the customer’s Storage Withdrawal Factor (“SWF”) times
471
.017 times the customer’s SBS capacity.
472
473
In addition, SBS users are restricted to monthly maximum injection levels during
the summer months. These customers are currently allowed to inject up to 25% of their
22
Nicor Gas Ex. 4.0
474
SBS capacity in any one month during the period April through October. The injection
475
rights awarded Customers are determined by the limits set by the calculated Maximum
476
Daily Nomination (“MDN”).
477
Q.
Do any other limitations currently exist with SBS?
478
A.
Yes. SBS withdrawal rights on a Critical Day are reduced for a customer if an inventory
479
level of at least 90% of their elected storage capacity is not met on November 1.
480
Withdrawal limitations are implemented through a reduction of the customer’s SWF as
481
further detailed in the Terms and Conditions section of Nicor Gas’ tariffs.
482
Q.
How is a customer’s SBS capacity and SWF determined?
483
A.
These particular SBS rights are reflective of Nicor Gas’ physical and operational storage
484
and/or design day demand. Available SBS capacity is a function of total system design
485
day demand relative to targeted on-system storage inventory. A customer’s SWF is a
486
function of targeted on-system storage inventory relative to its expected design day
487
deliverability.
488
Q.
489
490
Are you also familiar with the change that the Company is proposing regarding the
SBS users’ Critical Day withdrawal rights?
A.
Yes. As mentioned previously, a customer’s Critical Day withdrawal rights are currently
491
limited to the customer’s SWF of .017 times the customer’s SBS capacity. The Company
492
is proposing that the .017 factor be increased to .018, as reflected in the testimony of
493
Mr. Mudra. (Nicor Gas Ex. 14.0). This proposed change to the SWF will increase a
494
customer’s storage withdrawal rights on a Critical Day. A customer’s storage withdrawal
495
rights on a non-Critical Day will remain unchanged.
23
Nicor Gas Ex. 4.0
496
Q.
Do you support this proposal?
497
A.
Yes. I have reviewed the method used to determine the SWF, which is the same method
498
as that adopted by the Commission in the 2004 Rate Case. The .018 SWF is based on the
499
Company’s forecasted design day demand of 4.9 Bcf and the Company’s on-system
500
storage deliverability on a peak day of 2.5 Bcf.
501
Q.
What changes does the Company propose to implement regarding SBS?
502
A.
The Company is proposing two changes: (1) to revise the method of calculating a
503
customer’s MDN; and (2) to revise the daily nomination limit for the months of March
504
and April.
505
Q.
506
507
Please explain a customer’s MDN and the change that is proposed for the MDN
calculation.
A.
A Transportation customer’s MDN is currently applicable in the months of April through
508
October. It is the maximum amount of gas that a customer can nominate for delivery into
509
Nicor Gas’ system on a day. It is currently calculated for each month April through
510
October by adding (1) the customer’s historical monthly usage for the month, and
511
(2) 25% of the customer’s SBS capacity, with the resulting volume then converted to a
512
daily rate by dividing it by the number of days in the month.
513
The Company proposes to change the second part of this calculation for the
514
months of July through October. Instead of using 25% of the customer’s entire SBS
515
capacity in the MDN calculation, it is proposed that 25% of the difference between the
516
customer’s SBS capacity and the customer’s actual inventory balance at the end of April
517
be included in the MDN calculation.
24
Nicor Gas Ex. 4.0
518
Q.
Why is this change appropriate and necessary?
519
A.
Daily injection rights currently determined by using the entire amount of capacity in the
520
MDN calculation are predicated on the assumption that customers begin their injection
521
season with an inventory balance of zero in their accounts. However, the Company’s
522
actual daily injection capacity is reduced as total inventories increase due to the physical
523
characteristics of the fields. If a customer starts an injection season with an inventory
524
balance greater than zero, that customer would then have less open capacity to fill over
525
the summer and, therefore, should not require as high a level of injection rights over the
526
season in order to fill that capacity. In other words, a customer’s daily injection right
527
should be a function of its need to re-fill its empty storage capacity. This recognizes that,
528
for example, a customer that ends the withdrawal season with its storage capacity 50%
529
full needs half the level of injections as does a customer with its storage capacity 100%
530
empty to fully replenish its inventory. Changing the MDN calculation to be a function of
531
the open capacity remaining in a customer’s account at the end of the withdrawal season,
532
instead of a customer’s entire capacity, simply recognizes this fact and brings injection
533
rights more in line with actual storage operational limitations.
534
This proposal to change the MDN calculation is expected to help reduce the
535
potential need for Nicor Gas to “cap” pipeline deliveries for those days during the
536
injection season on which too much gas is being nominated to Nicor Gas’ system relative
537
to the level of injections which can be physically accommodated by the storage fields.
538
The Company has heard from shippers to its system that caps are disruptive. While the
539
Company must retain the current rights to impose caps to protect the operational integrity
540
of its operations and its ability to maintain reliable service to its customers, it is proposing
25
Nicor Gas Ex. 4.0
541
this change to reduce the likelihood that such actions will be required. This proposal
542
makes daily nomination limits proportionate to a customer’s need to fill storage. While
543
this proposal may not completely eliminate the need to issue caps as customers will
544
continue to be able to inject gas into their storage accounts during the month, it is
545
expected to help reduce the need to issue caps.
546
Q.
547
548
Why is the proposed change in calculation of the MDN not being applied for the
months of May and June?
A.
The answer lies in the practical limitations centered around the time when accurate
549
customer specific inventory balances are available. Daily meter reads are not available
550
for a number of customers with SBS rights, making it impractical to know each
551
customers specific inventory balance at April 30 until well into May. Even if that were
552
possible, being able to incorporate such numbers in a calculation to establish rights and
553
then being able to communicate the results to affected parties by an effective date of
554
May 1 would just not be possible. While Nicor Gas strongly believes that the rationale
555
set forth for the months of July through October are just as valid for May and June, the
556
Company has chosen to keep the process simple by accepting the practical limitations
557
associated with the lag in available data. This will allow time for an accurate
558
determination of April ending inventory balances for all customers and then an adequate
559
notice period for the new MDN that will take effect on July 1. This, of course, will
560
provide the customer with the benefits of the higher MDN levels for May and June.
561
Q.
Is the Company requiring SBS users to cycle their storage with this proposal?
562
A.
No. While the Company strongly encourages full cycling to maintain the operational
563
integrity of the fields, it is not requiring these customers to cycle the inventory they place
26
Nicor Gas Ex. 4.0
564
in storage. If a customer does fully cycle the gas they have placed in inventory, then they
565
will receive higher daily injection rights, by means of their MDN, than those customers
566
that did not fully cycle their inventory. Again, those customers who do not fully cycle
567
their inventory do not have as much empty, or open, capacity to fill and thus do not
568
require as high a level of injection rights to refill to their full storage capacity. It should
569
be pointed out that even though the daily rate is reduced for those not fully cycling their
570
inventory, the number of days allowed to achieve full inventory is the same for all
571
customers regardless of their starting point.
572
Q.
Please explain the Company’s second proposal.
573
A.
The Company’s second proposal is to change the Transportation customers’ daily
574
nomination limits for the months of March and April.
575
Q.
Why is such a change appropriate and necessary?
576
A.
March and April are two months that are critical to ensuring that Nicor Gas is
577
operationally able to cycle gas in inventory. These months are typically problematic
578
since weather begins to warm, which in turn reduces customer usage. Yet withdrawals
579
from Nicor Gas’ aquifer fields are operationally required through the month of April to
580
achieve maximum cycling. Cycling the gas in inventory provides significant operational
581
benefits through improved reservoir performance. Several disadvantages exist if targeted
582
levels of gas in inventory are not cycled including declining reservoir performance,
583
thereby increasing the potential for the gas not cycled to become ineffective, and lower
584
reservoir pressures going into the next withdrawal season translating into reduced
585
deliverability.
27
Nicor Gas Ex. 4.0
586
Historically, as shown on Nicor Gas Exhibit 4.2, Transportation customers
587
typically inject into their storage accounts during the months of March and April when,
588
operationally, Nicor Gas needs to be withdrawing from storage. There is no evidence to
589
suggest that this trend will change, nor are there currently any tariff limitations that
590
provide appropriate limits on injections in these months.
591
Q.
592
593
Please describe the Company’s proposal regarding daily nomination limits in March
and April.
A.
Transportation customers are currently allowed a significant level of injections during the
594
month of March, because their current daily nomination limit for March equals two times
595
their MDCQ. To put this in perspective, assuming typical normal usage for the month of
596
March, Transportation customers as a group could inject significantly more than 1 Bcf
597
per day into their storage accounts. This potential March storage activity by
598
Transportation customers is extremely adverse to Nicor Gas’ physical storage operations
599
given the Company’s need to be on withdrawal to maintain optimal field performance
600
and avoid a degradation of the integrity of the fields. Therefore, the Company proposes
601
to reduce March’s daily nomination limit on non-Critical Days for Transportation
602
customers from two times their MDCQ to 150% of the customer’s historical usage
603
calculated on a daily basis. If a customer has issues on a particular day with the daily
604
nomination limit (i.e., a customer expects to have usage greater than their stated MDN),
605
the Company will address the problem to the benefit of the customer.
606
Transportation customers currently are allowed to inject 25% of their storage
607
capacity during the month of April (based on the MDN previously discussed). The
608
Company proposes to limit the amount of inventory these customers can inject into
28
Nicor Gas Ex. 4.0
609
storage in April by changing April’s MDN on non-Critical Days for Transportation
610
customers from their historical usage plus 25% of their storage capacity to 110% of the
611
customer’s historical usage calculated on a daily basis. The Company fully expects this
612
MDN level will be sufficient to allow the customer to satisfy all of its delivery
613
requirements. However, as with the proposed change for March, if a customer has issues
614
on a particular day with the daily nomination limit (i.e., a customer expects to have usage
615
greater than their stated MDN) the Company will again address the problem to the benefit
616
of the customer.
617
Q.
Do any other benefits result from this second proposal?
618
A.
In addition to the operational benefits for storage this proposal provides, it also is
619
expected to reduce the potential need for pipeline caps. Nicor Gas has had to cap, or
620
limit, pipeline deliveries to its system several times over the last few years in order to
621
protect the operational integrity of its system and storage fields. Often times, these cap
622
periods were several days, even weeks, in length instead of just for a day or a few days.
623
As mentioned earlier, the Company has heard from shippers to Nicor Gas’ system that
624
caps are disruptive, and the Company wishes to reduce the chance for caps by proposing
625
this change. As with the first proposal, this change will not completely eliminate the
626
need to issue caps in these months as customers will continue to be able to inject gas into
627
their storage accounts during March and April (when storage operations are necessarily
628
withdrawing gas). However, the proposed change is expected to help reduce the need to
629
issue caps.
29
Nicor Gas Ex. 4.0
630
Q.
631
632
Does this conclude the portion of your testimony regarding end-use Transportation
Customers?
A.
Yes.
30
Nicor Gas Ex. 4.0