HomeMy WebLinkAbout20020904Volume 2, pg 141-181.pdf
1 (The following proceedings were
2 had in open hearing.)
3 MR. FELL: And move for the admission
4 of Exhibit Nos. 12 through 16.
5 COMMISSIONER SMITH: Without
6 objection, Exhibits 12 through 16 will be admitted.
7 (PacifiCorp Exhibit Nos. 12
8 through 16 were admitted into evidence.)
9 MR. FELL: Mr. Watters is available
10 for cross-examination.
11 COMMISSIONER SMITH: Thank you.
12 Mr. Olsen, do you have examination for
13 Mr. Watters?
14 MR. OLSEN: Just a few questions.
15
16 CROSS-EXAMINATION
17
18 BY MR. OLSEN:
19 Q. Mr. Watters, I direct you to page 2,
20 lines 1 through 15, of your rebuttal testimony. In
21 there you summarize the range of interruptible or
22 curtailment products which PacifiCorp has purchased
23 or proposed to purchase from its retail customers.
24 Are you familiar with the rate
25 proceedings that PacifiCorp filed earlier this year
150
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 where it adjusted or sought to recover various
2 extraordinary power purchase costs and also changed
3 rates of various customer classes here in Idaho?
4 A. I am fairly familiar, yes.
5 Q. Were you familiar with the rate
6 structure that the irrigation class had prior to the
7 settlement or the agreement that was reached between
8 the Company and various Intervenors?
9 A. Mr. Taylor would probably be the best
10 to answer that, but I am somewhat familiar with the
11 prior rate structure.
12 Q. Okay. Maybe just to refresh your
13 recollection, the prior Schedule 10 had what's known
14 as the ABC rate structure. I think the A schedule
15 had a firm rate, the C rate was an interruptible
16 rate?
17 A. Uh-huh.
18 Q. This is a general question:
19 Where would that interruptible rate as
20 a demand-side resource fall into your Exhibit 12,
21 which is discussed on page 2, lines 1 through 15?
22 A. Now, on Exhibit 12, it would fall
23 probably into the category of economic curtailment.
24 Q. Okay. Economic curtailment. And
25 there is two categories for that?
151
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. Yes. And, again, just to clarify,
2 each -- maybe Mr. Griswold referred to it, but each
3 customer is different, and those products are
4 tailored specifically to different customers and
5 what they can do. For instance, the Irrigators, if
6 I remember correctly have a real problem going too
7 many hours. They have to get enough water on their
8 fields, and so we -- I think previously the tariff
9 was structured somewhat to meet their requirements.
10 Q. Okay.
11 A. So these terms, all I'm saying is
12 across the sheet here they may not be exactly the
13 same, but they would fall under the general economic
14 curtailment category.
15 Q. Okay. That's all I was trying to find
16 out there, the general.
17 From your testimony here in your
18 rebuttal, is it fair to say that demand-side
19 resources like curtailment or interruptibility is a
20 important part of PacifiCorp's planning?
21 A. Yes.
22 Q. Okay.
23 MR. OLSEN: I'll reserve the other
24 questions for Mr. Taylor.
25 COMMISSIONER SMITH: Okay. Thank you,
152
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 Mr. Olsen.
2 Mr. Woodbury, do you have questions?
3 MR. WOODBURY: Yes, I do. Thank you.
4
5 CROSS-EXAMINATION
6
7 BY MR. WOODBURY:
8 Q. Mr. Watters, looking at your
9 Exhibit 12 --
10 A. Uh-huh.
11 Q. -- and I guess comparing that to
12 Mr. Griswold's Exhibit 4, does Exhibit 4 contain any
13 more complete list of interruptible curtailment
14 products?
15 A. I don't have Mr. Griswold's Exhibit 4.
16 Q. Okay. They are quite --
17 Maybe your Counsel can provide it.
18 COMMISSIONER SMITH: Mr. Woodbury, why
19 don't we wait until --
20 MR. WOODBURY: Pardon?
21 COMMISSIONER SMITH: Why don't we wait
22 until Mr. Watters' counsel has provided him with a
23 copy of that exhibit.
24 MR. WOODBURY: That's what I asked.
25 MR. FELL: (Indicating.)
153
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 THE WITNESS: Thank you, Jim.
2 This would be --
3 Maybe I could ask you to repeat your
4 question so that I'm clear.
5 Q. BY MR. WOODBURY: Have you seen
6 Mr. Griswold's Exhibit 4 before?
7 A. I have it in front of me now.
8 Q. Have you seen it before?
9 A. It looks somewhat familiar to other
10 things I've seen in the past.
11 Q. Would you accept, subject to check,
12 that the -- that the interruptible curtailment
13 products that you set forth in your Exhibit 12 are
14 also contained in Mr. Griswold's Exhibit No. 4, with
15 the exception maybe of system integrity?
16 A. They fall into the same general
17 category. It looks like here these are -- specific
18 terms have been laid out here because one is
19 referring to Monsanto specific demand-side options,
20 where my exhibit is more general in content, but
21 these would fall into these categories.
22 Q. All right. You indicate that your
23 Exhibit 12 represents those interruptible
24 curtailment products of most value to PacifiCorp.
25 Is that correct? Page 1, line 21.
154
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. Uh-huh. Yeah, I believe they do.
2 Q. And the way that you set them forth in
3 your Exhibit 12, is that a ranking in order of
4 value?
5 A. Not necessarily, no.
6 Q. And can you -- is there a ranking of
7 those?
8 A. Not really, and let me explain why,
9 because the economic curtailment options have -- I
10 think in my testimony I talked about what are the
11 parameters that make up the value associated with
12 those, and depending what those parameters are --
13 and we've already talked about it: What is the term
14 of the economic interruption, is it a summer only
15 product, is it an annual product, how many hours is
16 it, over what period of time is it -- because as we
17 evaluate that option, we have to take into
18 consideration what is the underlying values in the
19 marketplace associated with commodities that drive
20 markets.
21 For instance, natural gas. Natural
22 gas in the wintertime is typically higher as opposed
23 to maybe in the summer. Same thing with
24 electricity. Commodities move by season, their
25 prices move by season.
155
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 So depending on what the specific
2 product is, the economic curtailment could provide
3 greater value or it could provide less value than
4 the operating reserves, but it depends on how we
5 define it, how many hours a day is it. All of those
6 parameters come into values in those products.
7 Q. There was a discussion with
8 Mr. Griswold as to perhaps whether economic
9 curtailment offered by Monsanto would be of greater
10 value than the nonspinning operating reserve?
11 A. Uh-huh, I remember that.
12 Q. Would you agree with that?
13 A. I thought maybe if you could ask --
14 you asked it as do you remember the conversation
15 and, yes, I do.
16 Q. Do you remember that conversation?
17 A. Yes, I do remember the conversation,
18 but I'm wondering what your question is.
19 Q. Would you agree that with respect to
20 the products offered by Monsanto through this case,
21 that the economic curtailment would be of greater
22 value to PacifiCorp?
23 A. I think that's what we're going to
24 determine after we look at their rebuttal testimony
25 that came in, because it's not clear to me what the
156
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 offer is. And I think in our discussions with
2 Monsanto and now with the latest somewhat proposal
3 that they have put out in their rebuttal, we need to
4 evaluate that because the values move around, and I
5 think that we will be prepared to answer
6 specifically based on that.
7 Now, I will say this: In general,
8 with what was in my rebuttal testimony, or
9 specifically referring to the 500 hours of
10 interruption and what we've evaluated there, that
11 product, because it was 500 hours in length, we
12 could put it into the highest period of the market
13 which is what we would typically economically
14 curtail, which would be the summertime. So that 500
15 hours fits right into that peak amount. That, in
16 and of itself, provides a significant value, a
17 higher value than the operating reserves on a
18 per-kW-month basis.
19 Now, if you spread those hours out and
20 that's what we're going to be determining as we
21 evaluate the latest proposal going to 1,000 hours,
22 we're going to determine what is that value, and
23 what that will tend to do. I don't know the amount,
24 but I know the direction. It will drive the value
25 of those reserves on a per-kW-month basis down.
157
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 However, it may be more valuable to Monsanto because
2 they have increased the overall amount. So we have
3 to weigh both of those factors.
4 And so once we get to that, I'll be
5 able to answer that question more specifically, but
6 in the instance of the exhibits or the products that
7 are in my rebuttal testimony, right now on a
8 per-kW-month basis, that has a higher value.
9 Q. On page 7 of your testimony, you
10 speak -- you state that PacifiCorp is unwilling to
11 accept the risk, that the value of their reserves
12 will continue unchanged, and that there's a need to
13 incorporate some changes in the contract, and one of
14 those is the ability to change the agreement through
15 reopeners. Correct? You say based on the value of
16 the product -- the ability to change the agreement
17 based on the value of the product?
18 A. And, again, we're specifically
19 referring to the operating reserves in this case.
20 Is that what you're referencing? Page 7, lines --
21 Q. Starting at line 11.
22 A. Yes, that's what I thought. It's
23 directly referring to the operating reserves, and as
24 Mr. Griswold stated, the WECC has been having
25 numerous meetings discussing what will be the new
158
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 operating reserve criteria in the WECC, and
2 historically we've held seven percent on firm
3 service, half of which has to be spinning, half of
4 which is nonspinning. That's the product that we
5 have contracted in the past with Monsanto for is the
6 nonspin portion.
7 As we move forward, they're talking
8 about frequency response reserves, and they believe
9 that having more of those is more important to
10 reliability of the grid. Although we've been
11 operating for a number of years with the current
12 criteria, the WECC can change the criteria, making
13 PacifiCorp carry more frequency response reserves.
14 At the same time they're looking at if they do that,
15 maybe we don't have to carry as much of the other
16 contingency reserves. But it has not been settled
17 and it is the subject in a fairly good debate --
18 good, healthy debate -- and it has not been agreed
19 to, and I'm not a great prognosticator, but these
20 discussions have been going on for some time and all
21 I hear of is that they expect to have some decision
22 in 2003.
23 And I will say this as well: There is
24 good support for it and there is also some people
25 that are not having support for it. So we really
159
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 don't know. It's an unknown to us. And typically
2 when you have an unknown like that, managing the
3 risk of our system, we don't want to take on the
4 risk of buying a product that does not have value
5 for our customers and to fix that amount.
6 Q. Are you participating in those
7 discussions?
8 A. Personally, I am not. There are
9 people in our company that are.
10 Q. Is anybody from the Company
11 participating?
12 A. Yes, I just said that, that there are
13 people in the Company that are.
14 Q. Who?
15 A. Robert Williams, in our grid ops.
16 Mainly coming through the transmission side of the
17 business, because they're responsible for
18 reliability.
19 Q. Starting on page 7 of your testimony,
20 you enter into discussion regarding the valuation of
21 Monsanto's proposal for interruptibility?
22 A. Uh-huh.
23 Q. And the interruptible products that
24 you entertain to value are the economic curtailment
25 with a buy-through option, nonspinning operating
160
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 reserves, and the system integrity product. Now,
2 products that you're pricing have the
3 characteristics set forth in Mr. Griswold's
4 Exhibit 10?
5 A. Yes, Mr. Griswold's Exhibit 10 is
6 reflective of our valuation on Exhibits 13, 14, and
7 15 in my testimony. He's incorporated those values.
8 Q. I can't hear you.
9 A. He has incorporated those values into
10 his exhibit.
11 Q. And it was those particular
12 characteristics that you considered in developing a
13 pricing method?
14 A. Correct.
15 Q. And if those values were or
16 characteristics were to change, then your pricing
17 methodology would change also?
18 A. Not necessarily the methodology. I
19 think the methodology stays somewhat consistent,
20 but --
21 Q. Just the input data?
22 A. It really gets down to what I said
23 earlier, that as you increase certain elements of
24 this, such as the number of hours of interruption,
25 we are now spreading in that case again, like I
161
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 said -- I know what the direction is, but I don't
2 know the amount. When you spread 1,000 hours over
3 five days a week, eight hours a day, it's 40 hours a
4 week, 1,000 hours, that's roughly about seven, six
5 and a half, seven months that we're spreading that
6 over. In this case when we had earlier we were
7 spreading it mainly over the three key months of
8 summer, so there's a significant value difference.
9 But again, we need to evaluate it because Monsanto
10 has offered more hours, which has to be reflected in
11 the value to Monsanto. They've also added
12 additional amount in their rebuttal, and that's what
13 we're evaluating. But what will change -- the
14 methodology won't change. It's just that the
15 forward price curves and the value of gas in the
16 market is different over a longer period of time
17 than it is over a shorter period of time.
18 Q. In valuing those products, do you
19 consider also the presence of the reopeners that you
20 identify in page 5 of Exhibit 10; and if those
21 reopeners were not present, would it be priced
22 differently?
23 A. Exhibit -- Bruce Griswold's
24 Exhibit 10?
25 Q. Yes.
162
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. As far as the operating reserve
2 calculation, it is calculated based as if it would
3 stay with the current -- the current criteria in the
4 WECC. So we were making that assumption and that's
5 why we asked for a reopener on it, because if it
6 does change, then we would need to make the change.
7 Q. What about the agreement reopener with
8 respect to interruptibility? Does that affect your
9 pricing?
10 A. We have based our prices on current
11 market gas and electricity out through -- on a
12 forward price curve '02 through '06, the four years
13 that we've been talking about, 4.4 years -- or, four
14 years, four months.
15 Q. Looking at your Exhibits 13, 14, and
16 15, those are your calculation methods?
17 A. Uh-huh.
18 Q. And you have a bottom line on each of
19 those that shows a net benefit of zero on 14 and 15
20 also?
21 A. Correct.
22 Q. What is the Company intending to
23 convey by assigning zero as a net benefit, that the
24 options have no -- presented by Monsanto -- have no
25 net benefit to the Company?
163
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. What we're showing is that based on
2 our evaluation on each one of these products, that
3 we are providing Monsanto the full value of the
4 product in the marketplace.
5 Q. Looking at your Exhibit 13, you have a
6 line there on operating reserves calculation "lost
7 retail revenue," and you assign a value of 859,000.
8 Does that factor into the Company's choice of
9 alternatives, say, if you're choosing to meet your
10 requirements with a peaker resource and your other
11 choice was this, would you build a peaker to avoid
12 the risk of operating for lost revenue?
13 A. Would we build a peaker?
14 Q. Does this bias the Company in a way
15 that this is a factor in its particular choice?
16 A. What we have here is what is currently
17 on our system to carry reserves, how we carry
18 reserves, so the value here is based to us backing
19 off current generation that we have in our portfolio
20 that we use to carry operating reserves. That's
21 based on Cholla coal plant in Arizona and Gadsby.
22 These are our highest-cost incremental resources, so
23 that's where we carry 90 -- we carry more than just
24 there, but the 95 megawatts typically what we have
25 done here is we have weighted it what we can carry
164
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 on Cholla and what we can carry on Gadsby. Those
2 numbers are 40 megawatts on Cholla and 55 megawatts
3 on Gadsby. We then look at that and basically we do
4 not need Monsanto, so to speak, for operating
5 reserves, usually, during the evening hours. We
6 have adequate reserves currently in the system. So
7 this is evaluated over 430 hours a month, which
8 represents the heavy load hours, comparing us
9 backing off on our units against the market; because
10 otherwise if Monsanto provides us the product, we
11 would not back these units off, we would sell them
12 to market. So we looked at that on a annual basis
13 and provided here again the full value of that, less
14 the lost retail revenues.
15 Q. I understand -- do I understand that
16 the difference between the economic curtailment
17 option and the nonspinning operating reserve option
18 is one is interruption at -- economic curtailment is
19 interruption at PacifiCorp's discretion at any time
20 and the other is pursuant to WECC criteria?
21 A. This is what I would call a contingent
22 option, so to speak. We have to lose a unit that is
23 over 200 megawatts in size. Then we need to have
24 the operating reserves to cover that and we would go
25 to Monsanto to recover on an outage greater than
165
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 200 megawatts. If it's an outage on a unit that's
2 smaller than that, we don't have to respond by the
3 operating criteria, minimum operating criteria.
4 Q. Do you have any familiarity with the
5 multistate process?
6 A. Not an expert, but I have some
7 familiarity.
8 Q. Do you know whether the Utah task
9 force proceedings are open to Monsanto or whether
10 Monsanto has been invited to participate?
11 A. I believe Monsanto has been involved
12 in the multistate process. I believe that's true.
13 I don't know specifically about a Utah task force
14 though.
15 Q. Thank you, Mr. Watters. Mr. Watters,
16 who would be -- who would be the witness to ask
17 questions regarding the Magcorp contract and perhaps
18 the Empire contract, and the presence within those
19 contracts of reopener provisions?
20 A. I believe Mr. Griswold would be the
21 best person to answer those.
22 Q. Okay, I'll get him when he comes
23 back.
24 MR. WOODBURY: Thank you,
25 Madam Chairman. No further questions.
166
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 COMMISSIONER SMITH: Thank you,
2 Mr. Woodbury.
3 Mr. Budge.
4 MR. BUDGE: Thank you, Madam Chairman.
5 COMMISSIONER SMITH: You can still go
6 for another ten minutes.
7 MR. BUDGE: Do you want me to get
8 started until we need a break?
9 COMMISSIONER SMITH: Yes. Yes.
10 MR. BUDGE: Thank you.
11
12 CROSS-EXAMINATION
13
14 BY MR. BUDGE:
15 Q. Mr. Watters, looking at this matrix,
16 Exhibit 12, that provides various criteria for
17 interruptibility that the Company evaluates. That's
18 basically my understanding of what that exhibit
19 portrays, the things you look at in valuing an
20 interruptible customer?
21 A. Uh-huh, right.
22 Q. Would you agree that if you compared
23 Monsanto with virtually any other interruptible
24 customer you have available on the system, what
25 Monsanto's offered in this case, that Monsanto is
167
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 really at the top of the heap as far as providing
2 benefit and value to PacifiCorp?
3 A. I believe that Monsanto is one of the
4 people that are at the top of the heap. I believe
5 that Monsanto here has worked with us over a period
6 of time to look at the different options that are
7 available. I think we've both tried to respond to
8 each other the best we could, trying to find our way
9 through the forest here. But Monsanto trips its
10 furnaces.
11 I also have an agreement with Nucor
12 and they do a very fine job on interrupting their
13 furnaces as well for the Company.
14 We do not currently have economic
15 curtailment with Monsanto or with Nucor, and so from
16 that standpoint of the agreements we've had that
17 have been interruptible over the last few years,
18 both Monsanto and Nucor have provided benefits to
19 our eastern control area.
20 Q. As far as we look at what might be
21 considered unique characteristics of the Monsanto
22 interruptibility -- and I'm talking about the
23 proposal that's been laid out now and not prior
24 agreements -- would you agree that the sheer size of
25 the Monsanto load -- 162 megawatts -- makes it
168
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 unique from any other curtailment customer?
2 A. It is unique in the sense that it is
3 such a large load. And typically from an operating
4 standpoint when we're making phone calls to have to
5 trip loads, you have to -- well, some of these
6 products I won't offer to customers that are small,
7 because we can't cover it all. We can't offer it to
8 a two-megawatt customer. Even ten megawatts
9 sometimes might be pushing it. But for these very
10 large customers such as Monsanto, who is our
11 largest, I believe, making one phone call to cut
12 load is a nice thing from an operator's standpoint,
13 and that's what's nice about Nucor and -- is that we
14 can get big pieces; because most of the time our
15 system is going to respond to the small stuff just
16 fine, I'm not too concerned, but having the big
17 chunks that you can have to manage the system, it's
18 a nice feature.
19 Q. And when you make that one phone call,
20 the fact that Monsanto is able to come down
21 everytime and in a matter of seconds differentiates
22 it from even a Nucor, wouldn't it?
23 A. No, I have pretty much the same
24 parameters with Nucor. They will trip immediately.
25 They have to in order to -- they have to meet the
169
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 same criteria that we have with Monsanto.
2 Q. And what about the flexibility of
3 being able to take one, two, or three loads at a
4 time, does that make Monsanto more valuable or
5 unique to the Company?
6 A. Right today we can only take two at a
7 time. We can't take three unless I think it's under
8 an emergency.
9 Q. Well, if the ultimate proposal by
10 Monsanto was that you could take one, two, or all
11 three --
12 A. The latest one?
13 Q. Yes.
14 -- would that be more valuable to
15 you -- that flexibility provide more value than
16 other customers that do not allow those types of
17 increments?
18 A. That's -- that's a hard question. Let
19 me tell you why:
20 Under the current as of what I've read
21 as of yesterday Monsanto has offered economic
22 curtailment with buy-through on all three furnaces,
23 so when it comes time for planning to meet their
24 load, I can call Monsanto and say we're going to
25 economic curtailment. I do that two hours in
170
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 advance, and then they say back within one hour
2 whether they want to buy through or whether they
3 will take a physical interruption. So in this case,
4 I no longer have a physical interruption such as I
5 would have in the operating reserves; I have a
6 financial interruption. And it looks more like a
7 financial instrument to me, which means I still have
8 an obligation to serve Monsanto, I just get to
9 charge them a different price during those hours.
10 That is different than the arrangement, for
11 instance, that I have with Nucor, which is a
12 physical interruption on the system. So I'm just
13 trying to differentiate between the two, and so
14 that's why it's hard to answer your question. They
15 each provide different things.
16 Q. I understand. The types of
17 interruptions that Monsanto offered was intended to
18 provide the Company with the greatest flexibility to
19 provide value?
20 A. Uh-huh.
21 Q. And Monsanto has essentially said what
22 you would like, whatever you would like. We will
23 offer emergency or system integrity interruptions,
24 we'll offer economic interruptions, we'll also offer
25 operating reserve interruptions?
171
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. Uh-huh.
2 Q. Are there any other customers that
3 provide the Company with all three possibilities?
4 A. Currently, I am not aware of a
5 customer that has all three within -- that they have
6 offered, but I currently don't have a contract with
7 anyone that has all those either.
8 Q. And insofar as the hours that are
9 offered where you could take a one-hour block, a
10 three-hour block, a four-hour block, or eight-hour
11 block, does that not provide flexibility and value
12 to the Company in making its decisions?
13 A. What the economic -- if what we're
14 referring to, the latest proposal by Monsanto, then
15 what that does for the Company is it gives us a
16 hedge against market price in serving the load eight
17 hours a day for 1,000 hours a year. It's a
18 buy-through; it's still an obligation. So what it
19 does is it shifts that risk from PacifiCorp to
20 Monsanto and we're willing to pay Monsanto for that,
21 for them wanting to accept the market risk for 1,000
22 hours a year.
23 MR. BUDGE: I may have been confused.
24 Did you want to break at quarter to one?
25 COMMISSIONER SMITH: No.
172
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 MR. BUDGE: I misunderstood.
2 Q. BY MR. BUDGE: Mr. Watters, I wanted
3 to ask you about PacifiCorp's perspective whether
4 certain things that have been identified by others
5 are valued to your system -- valuable to your system
6 in the form of demand-side management response-type
7 programs. And there was a paper that was presented
8 to the National Association of Regulatory Utility
9 Commissioners recently at a meeting in Portland in
10 July. Did you attend that?
11 A. I did not attend that.
12 Q. But that report that NARUC presented
13 identified what they felt were some very specific
14 benefits of demand response programs, such as
15 curtailment of the Monsanto load, and I just wanted
16 to go through this list of a few points that they
17 had identified and have you tell me whether or not
18 you also feel those benefits would apply to the
19 PacifiCorp system in utilizing Monsanto's
20 curtailment as a resource.
21 A. Okay.
22 Q. The first benefit identified was
23 system reliability.
24 A. Yes.
25 Q. And the second one was cost reduction,
173
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 and cost reduction --
2 A. And this is specifically in
3 relationship -- get closer -- specifically --
4 Q. Specifically cost reduction was
5 referred to benefits that are provided through, A,
6 direct cost savings from avoided generation, as well
7 as avoided transmission and distribution costs; and,
8 B, direct and indirect reduction in the wholesale
9 market prices?
10 A. I just needed to ask you a clarifying
11 question on your question.
12 Q. Okay.
13 A. This is all in reference to
14 interruptibility of retail customers?
15 Q. Correct, interruptibility of the
16 Monsanto load as a valuable benefit in resource to
17 PacifiCorp.
18 A. It provides us a benefit against the
19 market prices. I think you mentioned that one.
20 Typically, we would tend to hedge out
21 our risk of our contracts based on the terms of
22 those agreements. So in the case of Monsanto, I'm
23 not sure that we would go build CT necessarily, but
24 we would definitely go to the market and secure a
25 product, and that's how I evaluated in my exhibits
174
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 what we would do and that again provides value for
2 us to mitigate risk.
3 In agreement -- there was a third
4 one. I can't recall what you said. You said
5 generation, market price.
6 Q. I think there was market price,
7 avoided transmission, and distribution costs was the
8 third item?
9 A. It's possible. I don't know in the
10 case of Monsanto, but it may be possible to avoid
11 some transmission if we had the ability to
12 automatically relay and trip Monsanto if there was
13 an issue on the transmission system, that otherwise
14 if we didn't have that remedy if it made us incur
15 capital costs to improve the transmission system.
16 So, it can. I'm just not sure about Monsanto,
17 whether it does that or not.
18 Q. Certainly there are savings in avoided
19 generation plan and there are savings regarding
20 possible market purchases, and you have a question
21 mark on transmission there?
22 A. Well, no, I said on generation.
23 Typically I would not go invest in a 30-year,
24 20-year generation asset for a five-year contract.
25 That's -- that would be my position there. But if
175
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 Monsanto was a long-term, then indeed having the
2 ability to trip could avoid building new generation.
3 Q. The third item was market efficiency
4 which was described in the paper to the extent
5 customers will alter behavior to reduce or shift
6 on-peak usage and costs to off-peak periods that
7 result in more efficient use of the remaining
8 electric system. Would that be a yes?
9 A. In general, that is very true. In the
10 case of a utility like PacifiCorp that has a unique
11 system of hydro assets and thermal assets, we
12 typically keep our thermals pretty well loaded as it
13 is by how we operate on-peak the hydro and then fill
14 the pond, so to speak, off-peak by running our
15 thermals and putting our energy back in our hydros.
16 So the way we operate the system, that automatically
17 makes ours more efficient. That's not to say that
18 there wouldn't be some benefit of shifting in the
19 system, but in general we would probably not see as
20 much benefit as some other thermal-based systems.
21 Q. And Monsanto's consumption of those
22 shoulder or off-peak hours also adds to that same
23 efficiency of operation of the thermal units, does
24 it not?
25 A. It would be a load on the system that
176
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 would be served during that time period, so
2 obviously that's coming from our resources.
3 Q. Okay, the fourth point is risk
4 management. Demand response allows utilities to
5 hedge their risk exposure to system emergencies and
6 price volatility?
7 A. Yes, that's very true, and that's
8 exactly how we did our evaluation in the case of
9 Monsanto is looking at market price volatility.
10 Q. And environmental issues. I believe
11 that refers to the fact that peaking plants are some
12 of the more inefficient which you have and their
13 operation creates certain environmental concerns in
14 the way of emissions. All of those things would be
15 avoided through curtailment of the existing
16 customer?
17 A. I'm not a -- I'm not an expert on our
18 emissions, but I'm assuming that -- I do know that
19 they -- our new peakers -- West Valley, Gadsby --
20 are better for the environment than the Gadsby steam
21 units that ran on gas, and it is also, I believe,
22 they are better environmentally.
23 Q. And I think the point is we would
24 certainly add more environmental problems if we were
25 not having them at all?
177
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 A. I guess there would be some detriment
2 to the environment.
3 Q. The fifth point was market power
4 mitigation, the use of reliability-based or
5 market-based demand response during peak periods
6 provides a important safety valve for the market.
7 Use of coal plants could eliminate the need to make
8 high, above-market bids?
9 A. I think that's generally true,
10 although the West-wide market is a very charming
11 market, so that would need to be -- I think a
12 comment there is referring to if we had a lot of
13 that around the West, you could really mitigate; but
14 if you only have 1,000 megawatts of it or something
15 less than that, it may not be mitigated that much
16 depending on where we are and what time of the year
17 it is. But obviously specifically for PacifiCorp,
18 that's why we're pricing these options out to
19 Monsanto, because they do provide value to us, and I
20 don't think that's in question.
21 Q. And then the final point: I asked you
22 about market efficiency. What about system
23 efficiency from an operational standpoint, demand
24 response curtailment such that Monsanto provides an
25 option to use -- to address any transmission or
178
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 distribution bottlenecks that may exist?
2 A. Again, one thing as I've been
3 listening here today that we really need to keep in
4 mind as we talks about this is we need to look at
5 interruptions and I think referring to them as what
6 they are. System integrity definitely helps if
7 we're in an emergency situation on a -- the entire
8 system.
9 Economic curtailment, I don't know
10 what Monsanto is going to do, I don't know. They
11 may not help me at all. They may buy through. That
12 would provide me no benefit.
13 Operating reserves is obviously a
14 relationship we've had together for some time and
15 that is a benefit to our system operations and that
16 can tend to help make our system more efficient. So
17 as we go forward, there's really three things there,
18 and we need to keep that in mind.
19 Q. If you look to a demand response
20 offering like Monsanto, does that not, in effect,
21 eliminate the capital costs the Company otherwise
22 has to spend to build peaker plants? Is capital
23 costs a consideration?
24 A. It all depends on location and
25 everything. Peaker plants could have been needed
179
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 in -- I mean, there was reasons why the peakers are
2 located down in Salt Lake: It's a large load area
3 that we put those peakers in place. There is
4 voltage support issues in the Wasatch Front and
5 themselves, they tended to help that.
6 So peakers are -- when one looks at a
7 peaker and I think there's some testimony by
8 Mr. Rosenberg and a few others on peakers, with
9 peakers, peakers could give you a lot of
10 flexibility. Peakers and Monsanto do as well.
11 But the other thing peakers do is I
12 have them available to me all the time. They're
13 available 8,760 a year, which makes them a little
14 bit different.
15 Right now we're operating our peakers
16 well over 30 percent. So one needs to consider how
17 often we're operating them and because the peaker
18 technology, these peakers are pretty much in the
19 money quite a bit of the time, so they provide value
20 beyond typically hitting a peak resource. I'm able
21 to market those and make them more efficient during
22 the day. And they also carry operating reserves.
23 So depending on what ultimate
24 arrangement comes out of this process with Monsanto,
25 if it's 162 megawatts of economic curtailment, that
180
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp
1 provides me a hedge against market operation risk
2 but it doesn't provide me operating reserves like a
3 peaker that adds value to my system. So it's really
4 hard to say how you would compare the two, because
5 really there's a little bit of apples and oranges
6 there. It's not straightforward.
7 COMMISSIONER SMITH: Mr. Budge, would
8 this be a good time to break?
9 MR. BUDGE: Very good. Thank you.
10 COMMISSIONER SMITH: Thank you.
11 We will come back at 2:15 and continue
12 Mr. Budge's cross.
13 (Noon recess.)
14
15
16
17
18
19
20
21
22
23
24
25
181
HEDRICK COURT REPORTING WATTERS (X-Reb)
P.O. BOX 578, BOISE, ID 83701 PacifiCorp