Exhibit 99.1
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STATE OF ALASKA
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THE REGULATORY COMMISSION OF ALASKA
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Before Commissioners: G. Nanette Thompson, Chair
Bernie Smith
Patricia M. DeMarco
Will Abbott
James S. Strandberg
In the Matter of an Investigation into the 1999 )
Revenue Requirement and Cost of Service ) U-00-88
Studies Filed by ENSTAR NATURAL GAS )
COMPANY and ALASKA PIPELINE COMPANY ) ORDER NO. 1
_________________________________________________)
ORDER REQUIRING FILINGS; DESIGNATING PUBLIC ADVOCACY
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SECTION A PARTY; APPOINTING A HEARING EXAMINER;
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ESTABLISHING DEADLINES FOR INTERVENTION; AND
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SCHEDULING PREHEARING CONFERENCE
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BY THE COMMISSION:
Summary
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In this Order we find the revenue requirement and cost-of-service
(COSS) studies filed by ENSTAR NATURAL GAS COMPANY (ENSTAR) and its affiliate,
ALASKA PIPELINE COMPANY (APLC), generally comply with Order U-99-93(1)/
U-99-94(1) and the form of 3 AAC 48.275(a)[FN]1 and 3 AAC 48.275(h). However,
based on the information in those filings, we determine that further substantive
investigation of ENSTAR's and APLC's revenue requirement study and COSS are
required to ensure rates charged to customers are just and reasonable.[FN]2
This Order
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[FN]
1 The currently effective revenue requirement and rates of ENSTAR,
including a return on equity of 15.65 percent and a weighted average cost of
capital of 13.07 percent were approved by Order U-84-59(15), dated May 7, 1986.
See also 7 APUC 375, 401.
2 See AS 42.05.381(a).
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
requires ENSTAR/APLC to submit prefiled testimony explaining their filings and
addressing the issues we identify. We also require ENSTAR to file copies of the
Management Agreement (MA) and Tax Sharing Agreement (TSA) it has entered into
with its new parent company, SEMCO Energy, Inc. (SEMCO), and a reconciliation of
its 1999 annual operating report with its audited financial statements.
We designate the Public Advocacy Section (PAS) a party to this
proceeding and appoint Patricia Clark as Hearing Examiner. We also schedule a
prehearing conference and establish deadlines for intervention in this
proceeding.
Background
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We approved transfer of ownership of ENSTAR to SEMCO, subject to
conditions.[FN]3 Our conditions of approval included a requirement that ENSTAR
file, by July 1, 2000, a revenue requirement study and COSS using a 1999 test
period.[FN]4 We also prohibited recovery through rates of any acquisition
adjustment resulting from the transactions. Finally, we required SEMCO to
maintain the accounts and operating books and records of ENSTAR separately from
APCL and also separately from the books of SEMCO.
On November 1, 1999, SEMCO completed the purchase of ENSTAR for
approximately $290 million. ENSTAR timely filed its revenue requirement study
and COSS on April 13, 2000. Commission Staff (Staff) reviewed ENSTAR's filings
and found them to be generally compliant, in form, with the requirements of
________________________
[FN]
3 See Order U-99-93(1)/U-99-94(1), dated October 19, 1999.
4 See Order U-99-93(1)/U-99-94(1) that required these filings be made into
a new docket. This docket was opened to receive the filings.
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
3 AAC 48.275(a) and 3 AAC 48.275(h). However, the information contained in the
filings raised several issues, identified below, which we determine should be
further examined.
Discussion
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ENSTAR's overall rates were last reviewed fifteen years ago. There
have been significant changes in the demography and economy of ENSTAR's service
area since then and significant changes in organization and cost structure have
occurred with ENSTAR's ownership changes. This is an appropriate time to
establish a new benchmark for evaluating the reasonableness of ENSTAR's rates
based on the filings in this Docket. We find that the ENSTAR/APLC revenue
requirement study and COSS filings raise the following issues regarding
compliance with our prior orders.
Acquisition Adjustment
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First, ENSTAR reflects an acquisition adjustment in its audited
financial statements, annual operating report, and revenue requirement study.
Therefore, the issue arises whether ENSTAR is including an acquisition
adjustment in its current rates.[FN]5 (See also AS 42.05.441.)
Tax Sharing (TSA) and Management Agreements (MA)[FN]6
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Second, ENSTAR recorded approximately $30 million in deferred tax
liability on its 1999 annual operating report. A deferred tax liability
generally
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[FN]
5 See Order U-99-93(1)/U-99-94(1), Ordering Paragraph No. 6.
6 See n. 3 to ENSTAR's 1999 audited financial statements.
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
represents a temporary deferral of income tax that will be paid in a future
period, but is recorded as a current period expense. For ratemaking purposes,
deferred tax liability represents a source of cost-free capital that does not
require a provision for return on investment (i.e., deferred tax liability
generally serves to reduce rate base).
Review of ENSTAR's audited financial statements for the two years
ending December 31, 1998, and December 31, 1999, indicates that ENSTAR has
entered into a TSA with SEMCO. That TSA requires ENSTAR to pay an amount equal
to the amount of income taxes it would pay on a stand-alone basis, including
consideration of the acquisition adjustment entries recorded on ENSTAR's
financial statements.
The TSA appears to differ from the agreement ENSTAR had with SEMCO's
predecessor, Ocean Energy, Inc. (Ocean). The former agreement required ENSTAR to
pay an amount generally equal to the amount of income taxes which would be
payable by ENSTAR, excluding the effects of historical acquisition adjustments.
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Therefore, the issue arises, again, as to whether ENSTAR is including an
acqusition adjustment in its rates as well as the issue of whether ENSTAR is
engaged in transactions with an affiliated interest that adversely affect the
cost of service to the utility. (See AS 42.05.441 and AS 42.05.511.).[FN]7
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[FN]
7 AS 42.05.511 provides, in pertinent part, that:
(c) [I]n a rate proceeding the utility involved has the burden of proving
that any written or unwritten contract or arrangement it may have with any of
its affiliated interests for the furnishing of any services or for the purchase,
sale, lease, or exchange of any property is necessary and consistent with the
public interest and that the payment made therefor, or consideration given, is
reasonably based, in part, upon the submission of satisfactory proof as to the
cost to the affiliated interest of furnishing the service or property and, in
part, upon the estimated cost the utility would have incurred if it furnished
the service or property with its own personnel and capital.
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
ENSTAR and SEMCO have entered into a new MA relating to management,
financial reporting, legal, human resources, treasury, investor relations, and
administrative services. The terms of that agreement, as described in ENSTAR's
financial statements, indicate ENSTAR must pay the direct cost of receiving
those services, in addition to allocable portions of SEMCO's general and
administrative expenses associated with providing the services. In its revenue
requirement study, ENSTAR has proposed pro forma adjustments to reflect a
budgeted amount of management and other fees to be paid to SEMCO in the amount
of approximately $2.5 million, in contrast to test period expense reported as
approximately $2.0 million.[FN]8 The 25 percent increase does not appear to be
offset by reductions to existing ENSTAR labor costs because ENSTAR also proposes
pro forma adjustments to increase test period labor costs by approximately 6.8
percent.[FN]9 Again, the issue arises as to whether ENSTAR is engaged in
transactions with an affiliated interest that adversely affect the cost of
service to the utility. (See AS 42.05.511.) However, ENSTAR did not file the TSA
or MA with us, so we are unable to evaluate the relationship between the terms
in these agreements and the revenue requirement study and COSS.
Capital Structure
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Third, ENSTAR proposed the use of a hypothetical capital structure, in
lieu of its actual capital structure or that of SEMCO, based on the average
capital structure for distribution companies reported in the American Gas
Association's 1999 GAS Facts. Therefore, the issue arises whether ENSTAR used
the appropriate capital
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[FN]
8 See Schedule J of ENSTAR revenue requirement filed April 13, 2000.
9 See Schedule D of ENSTAR revenue requirement.
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
structure in its revenue requirement filing and whether it would be appropriate
to consider the use of a double leverage adjustment to compute ENSTAR's cost of
capital.[FN]10
Rate of Return
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Finally, ENSTAR's approved return on equity is 15.65 percent with a
total weighted average cost-of-capital of 13.07 percent.[FN]11 In its revenue
requirement filing, ENSTAR states that it is achieving an 11.76 percent return
on equity and a 10.15 percent rate of return. A significant amount of time has
elapsed since ENSTAR's rate of return was reviewed. Therefore, we believe it
would be appropriate to determine whether ENSTAR's rate of return should be
modified to reflect general changes in economic conditions and whether ENSTAR's
rate of return is adequate to meets its capital requirements.
Burden of Proof
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We find that ENSTAR has the burden of proving that its revenue
requirement study and COSS are just and reasonable and in compliance with the
conditions imposed in our prior Orders. (See Order U-99-93(1)/U-99-94(1).)
Therefore, in further proceedings to be scheduled in this docket, we will
examine the reasonableness of rates based on ENSTAR's 3 AAC 48.275 filings. Upon
completion
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[FN]
10 A double leverage adjustment imputes the capital structure of a parent
company onto the subsidiary, in order to more accurately represent the true cost
of the subsidiary's capital. See Order U-84-59(15), 7 APUC 375. In approving
ENSTAR's last rate case, the Commission placed ENSTAR on notice that it would
consider ENSTAR's status as a subsidiary of a holding company in determining
appropriate capital structure.
11 See Order U-84-59(15), dated May 7, 1986.
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
of further inquiry, we may find that changes in the existing rates may be
appropriate. If so, such changes would be applied on a prospective basis.
Public Advocacy Section
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The Commission Chair determines that it is in the public interest for
the PAS to participate as a party in this proceeding.[FN]12 The PAS shall
operate separately from the remainder of the Commission.[FN]13 As a party,
the PAS will investigate all relevant issues; will present the results of its
investigation to us; and may submit stipulations of agreed upon issues for our
approval.
Hearing Examiner
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The Commission Chair believes that it is appropriate to appoint a
Hearing Examiner in this matter.[FN]14 The powers of a Hearing Examiner
appointed by the Commission Chair, and the procedures to be followed in matters
assigned to a Hearing Examiner, are further defined at AS 42.05.171 and
3 AAC 48.165. Accordingly, the Chair appoints Patricia Clark as the Hearing
Examiner in this proceeding.[FN]15
Prehearing Conference
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A prehearing conference is set for February 8, 2001, at 8:30 a.m., to
establish a procedural schedule and to address other matters that would aid in
the
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[FN]
12 See AS 42.04.700(c).
13 See AS 42.04.150.
14 See AS 42.04.070.
15 See As 42.04.070, AS 42.05.171, 3 AAC 48.165.
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
orderly and efficient disposition of this case. At the prehearing conference,
the parties should be prepared to discuss discovery matters and to propose a
procedural schedule. Input from the parties should reduce or eliminate the need
for filing motions for extension of time. Once a procedural schedule has been
established with input from the parties, we will not favorably consider motions
for extension of time and will be inclined to deny such motions absent exigent
circumstances.
The parties may appear telephonically for the prehearing conference.
Any party wishing to appear telephonically must so advise us in writing at least
one week before the prehearing conference and provide a telephone number where
they may be reached for that appearance.
Intervention
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Any persons who wish to file petitions to intervene in this proceeding
must file their petitions to intervene by the deadline established in this
Order.[FN]16 Any party to this proceeding may file an answer to the petition to
intervene seven days after the petition is filed.[FN]17
ORDER
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THE COMMISSION FURTHER ORDERS:
1. ENSTAR Natural Gas Company is required to submit prefiled testimony
explaining its pro forma adjustments and responding to the issues identified in
the body of this Order.
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[FN]
16 See 3 AAC 48.110.
17 See 3 AAC 48.110(e).
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
2. The Public Advocacy Section is designated a party to this
proceeding.
3. Patricia Clark is appointed to serve as the Hearing Examiner in
this proceeding.
4. By 4 pm, January 12, 2001, any entity interested in participating
in this proceeding must file a petition to intervene.
5. A prehearing conference[FN]18 is scheduled to convene at 8:30 am,
February 8, 2001, in our hearing room at 1016 West Sixth Avenue, Suite 305,
Anchorage, Alaska.
6. By 4 pm, February 2, 2001, any person wishing to appear
telephonically at the prehearing conference must file a written notice of the
intent to appear telephonically and provide a name and telephone number for that
appearance.
7. By 4 pm, December 15, 2000, ENSTAR Natural Gas Company shall file a
copy of the Tax Sharing Agreement and a copy of the Management Agreement with
SEMCO Energy, Inc.
8. By 4 pm, December 1, 2000, ENSTAR Natural Gas Company is required
to file a reconciliation of its 1999 audited financial statements to its 1999
annual operating report.
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[FN]
18 If you are a person with a disability who may need a special
accommodation, auxiliary aid, or service or alternative communication format in
order to participate in this prehearing conference, contact Georgann Joy at
1-907-276-6222 or TTY 1-907- 276-4533 before the prehearing conference to make
the necessary arrangements.
</FN>
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
<PAGE>
9. By 4 pm, December 1, 2000, ENSTAR Natural Gas Company is required
to file a copy of its capital expenditure plan for fiscal years 2000 and 2001,
and a copy of its most recent forecast of customer demand and resources to meet
that demand through 2005.
DATED AND EFFECTIVE at Anchorage, Alaska, this 22nd day of November, 2000.
BY DIRECTION OF THE COMMISSION
Commissioners G. Nanette Thompson, Chair,
and Will Abbott, not participating.)
(S E A L )
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REGULATORY COMMISSION OF ALASKA
1016 West Sixth Avenue, Suite 400
Anchorage, Alaska 99501
(907) 276- 6222; TTY (907) 276- 4533
