WWP621.docx

1 BOISE, IDAHO, WEDNESDAY, JUNE 21, 2000, 9:30 A. M.
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4 COMMISSIONER SMITH: Good morning,
5 gentlemen. This is the time and place set for a
6 rehearing, reconsideration of Case No. AVU-E-99-6,
7 further identified as in the matter of the application of
8 Avista Corporation for authority to sell its interest in
9 the coal-fired Centralia power plant.
10 We'll begin this morning with the
11 appearances of the parties and first we'll start with
12 Mr. Ward.
13 MR. WARD: Thank you. Conley Ward of the
14 firm Givens Pursley in Boise on behalf of Potlatch
15 Corporation. With me on my right is Dennis Peseau and on
16 my left is Bill Nicholson of Potlatch.
17 COMMISSIONER SMITH: Mr. Dahlke.
18 MR. DAHLKE: Gary Dahlke of the firm of
19 Paine, Hamblen, Coffin, Brooke and Miller, Spokane,
20 Washington, and appearing with me is Mr. Ronald McKenzie
21 for Avista Corporation.
22 COMMISSIONER SMITH: Thank you and
23 Mr. Woodbury.
24 MR. WOODBURY: Scott Woodbury, Deputy
25 Attorney General, for Commission Staff.
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 COMMISSIONER SMITH: Thank you. Are there
2 any preliminary matters or motions that need to be taken
3 up at this time?
4 MR. WARD: Yes, Madam Chairman, there's one
5 or maybe two preliminary matters. The first is we filed
6 this morning rebuttal testimony of Dennis Peseau in this
7 case. I know it's probably reached the Commission only
8 moments before we began. If the parties or the
9 Commission has not had time to review that, I would
10 suggest we take a short break and allow that to be done
11 rather than reading it into the record.
12 COMMISSIONER SMITH: Okay. Was it your
13 intention, then, Mr. Ward, to do your direct and rebuttal
14 at the same time?
15 MR. WARD: Yes, if that's the pleasure of
16 the parties and Commission.
17 COMMISSIONER SMITH: Let's go off the
18 record for a minute.
19 (Off the record discussion.)
20 COMMISSIONER SMITH: All right, we'll be
21 back on the record. Mr. Ward.
22 MR. WARD: Thank you. We'd call Dennis
23 Peseau to the stand.
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 DENNIS E. PESEAU,
2 produced as a witness at the instance of Potlatch
3 Corporation, having been first duly sworn, was examined
4 and testified as follows:
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6 DIRECT EXAMINATION
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8 BY MR. WARD:
9 Q Dr. Peseau, would you please state your
10 name and address for the record?
11 A Yes. My name is Dennis E. Peseau,
12 P-e-s-e-a-u. My address is 1500 Liberty Street, S.E., in
13 Salem, Oregon.
14 Q And by whom are you employed and in what
15 capacity?
16 A I'm president of Utility Resources, Inc.
17 Q In preparation for this proceeding today,
18 did you prepare prefiled direct testimony consisting of
19 some 17 pages of testimony?
20 A Yes, I did.
21 Q And Exhibit Nos. 205 through 209?
22 A Yes.
23 Q And do you have any corrections or changes
24 to make to that testimony or exhibits?
25 A Yes. As a result of the testimony of
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CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 Mr. McKenzie, it became clear that our calculations of
2 the proceeds due to Potlatch if given, if granted by the
3 Commission to be distributed on a lump sum basis,
4 Mr. McKenzie points out the fact that we had a carrying
5 cost in there that would not be appropriate and I address
6 that in my rebuttal testimony. I guess we're not sure
7 whether that -- but at any rate, the numbers, maybe I
8 should correct them. If I can refer everyone to my
9 direct testimony on page 17.
10 Q Go ahead and make your corrections,
11 Dr. Peseau.
12 A On line 7 of page 17, the figure of
13 $255,000 appears. That number is -- the corrected number
14 is $408,000 and that's the result of line 8, an incorrect
15 reference to a five-year period. The number "5" should
16 be replaced by "8." That results in line 13 being
17 changed, according to Mr. McKenzie's numbers, to the
18 figure of 332,195. That concludes my corrections.
19 MR. WOODBURY: Dr. Peseau, at the beginning
20 of line 8 on page 17, wouldn't that $51,000 figure
21 change, also?
22 THE WITNESS: No.
23 MR. WOODBURY: You're right.
24 Q BY MR. WARD: With those corrections -- oh,
25 also the numbers on Exhibit 209, there would be a similar
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CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 correction to the Potlatch lump sum share on Exhibit
2 No. 209?
3 A That's correct and I believe the corrected
4 exhibit actually was produced in response to a data
5 request from Avista.
6 Q Thank you. With those corrections, if I
7 asked you the questions contained in your rehearing
8 direct testimony this morning, would your answers be as
9 given?
10 A Yes.
11 MR. WARD: Madam Chairman, I'd request that
12 the direct testimony of Dr. Peseau be spread on the
13 record as if read and Exhibit Nos. 206 through 209 be
14 marked for identification.
15 COMMISSIONER SMITH: Did you give up on
16 205?
17 MR. WARD: No. Excuse me, 205 through 209.
18 COMMISSIONER SMITH: Is there any
19 objection?
20 MR. DAHLKE: No objection.
21 COMMISSIONER SMITH: Without objection, we
22 will spread the prefiled testimony of Dr. Peseau upon the
23 record as if read and identify Exhibits 205 through 209.
24 MR. WARD: Thank you.
25 (The following prefiled direct
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CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 testimony of Dr. Dennis Peseau is spread upon the
2 record.)
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CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 Q PLEASE STATE YOUR NAME AND BUSINESS
2 ADDRESS.
3 A My name is Dennis E. Peseau. My business
4 address is 1500 Liberty Street, S.E., Suite 250, Salem,
5 Oregon 97302.
6 Q BY WHOM ARE YOU EMPLOYED AND IN WHAT
7 CAPACITY.
8 A I am the President of Utility Resources,
9 Inc., ("URI").
10 Q ARE YOU THE SAME DENNIS PESEAU WHO PREFILED
11 DIRECT TESTIMONY EARLIER IN CASE NO. AVU-E-99-6?
12 A Yes.
13 Q DOES THAT PREFILED TESTIMONY REMAIN TRUE
14 AND ACCURATE TO THE BEST OF YOUR KNOWLEDGE?
15 A Yes.
16 Q ARE YOU AGAIN REPRESENTING POTLATCH
17 CORPORATION IN THIS MATTER?
18 A Yes.
19 Q WHAT IS THE PURPOSE OF THIS TESTIMONY?
20 A In response to a March 28, 2000 petition by
21 Potlatch Corporation, the Commission found on April 26,
22 2000 that it was "...reasonable on grounds of equity and
23 fairness to provide Potlatch with additional opportunity
24 to present its claims of entitlement to a share of the
25 customer portion of the Centralia gain" Order 28355 at 2.
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D. PESEAU Di 2
Potlatch Corporation
1 The Commission then established dates for prefiled
2 testimony by parties, as well as a date for hearing on
3 reconsideration. My testimony is filed in response to
4 the Commission's order.
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D. PESEAU Di 2a
Potlatch Corporation
1 Q WHAT LED POTLATCH TO REQUEST
2 RECONSIDERATION IN THIS PROCEEDING?
3 A The Commission's original order stated that
4 "...the company in this case presents a persuasive
5 argument for denying Potlatch any share of the customer
6 portion of the Centralia gain." Order No. 28297 at 11.
7 The argument made by Avista is summarized on page 6 of
8 the Commission's order.
9 Potlatch is excluded from the sharing of any gain
because, the company contends, it is a special
10 contract customer. The rates for Potlatch are not
entirely based on cost of service ratemaking
11 principles. Tr. Pp. 177, 178,191, 192. Potlatch
is not subject to price adjustments (either
12 increases or decreases), is exempted from PCA
rebates and surcharges, is exempted from the
13 WWP-E-98-11 general rate increase. Tr. P. 158.
Price adjustments for Potlatch are identified in
14 its contract. Tr. P. 180.
15 As I will explain later, these assertions are not
16 completely accurate and they lead to misleading
17 inferences. But even if these factual assertions were
18 correct, they do not constitute a persuasive argument for
19 denying Potlatch a portion of the Centralia gain.
20 Q HOW DID YOU ARRIVE AT THIS CONCLUSION?
21 A Avista's argument essentially amounts to an
22 assertion that Potlatch is not entitled to participate in
23 the Centralia gain because its contract is different than
24 a tariff and is not subject to certain types of rate
25 adjustments. Stated in this fashion it becomes obvious
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D. PESEAU Di 3
Potlatch Corporation
1 that the "argument" is simply a conclusory allegation
2 rather than a rational analysis. Avista is basically
3 arguing that Potlatch should be excluded from the
4 Centralia recovery because it is a unique customer.
5 There is
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D. PESEAU Di 3a
Potlatch Corporation
1 no question Potlatch is unique in many respects, but this
2 is irrelevant to the question at hand. In order to test
3 the validity of Potlatch's claim we must discard the
4 conclusory characterizations and instead conduct a
5 rational analysis of the issue.
6 Q HOW DO YOU PROPOSE TO CONDUCT SUCH AN
7 ANALYSIS?
8 A The logical way to approach this issue is
9 to pose three sequential questions:
10 1. What is the basis or rationale for allocating
11 a portion of the Centralia gain to Avista's Idaho
12 ratepayers?
13 2. Does this rationale apply with equal force to
14 Potlatch?
15 3. If the rationale does apply, does the Potlatch
16 contract waive this entitlement or otherwise bar
17 Potlatch's participation?
18 Q ALRIGHT, LETS BEGIN WITH THE FIRST
19 QUESTION. WHAT WAS THE BASIS FOR THE COMMISSION'S
20 DETERMINATION THAT IDAHO RATEPAYERS ARE ENTITLED TO A
21 PORTION OF THE CENTRALIA GAIN?
22 A The Commission's Order accepted the
23 argument that "the ratepayers' payment of depreciation
24 expense on property other than real property establishes
25 a right to [a portion of] the gain on the sale of an
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D. PESEAU Di 4
Potlatch Corporation
1 asset." Order No. 28297 at 8. I summarized the
2 conceptual basis for this "depreciation reserve
3 methodology" in pages 3-4 of my original prefiled
4 testimony in this proceeding, which I attach here as
5 Exhibit No. 205. Virtually identical arguments were also
6 advanced by the Commission staff.
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D. PESEAU Di 4a
Potlatch Corporation
1 The essential principle underlying the
2 Commission's decision is that customers of Avista,
3 through paying for depreciation in rates, "return" the
4 original shareholder investment in Centralia. To the
5 extent that investment has been returned, customers
6 become "equitable owners" who are entitled to a pro rata
7 share of the gain roughly equal to the percentage of the
8 original investment cost that has been repaid through
9 depreciation. In short, prior depreciation payments
10 provide both the rationale for ratepayer participation
11 and the method of quantifying the customers' entitlement.
12 Q HOW CAN YOU BE POSITIVE THIS WAS THE
13 COMMISSION'S RATIONALE FOR ITS ORDER?
14 A First, the Order expressly says so.
15 Secondly, no other argument was advanced for customer
16 sharing at any time during the proceedings, nor is any
17 other basis referenced in the Commission's Order.
18 Q VERY WELL. TURNING TO YOUR SECOND
19 QUESTION, DOES THIS RATIONALE APPLY WITH EQUAL FORCE TO
20 POTLATCH?
21 A Unquestionably it does. In fact, I will go
22 farther and state that taking a contrary position on this
23 point seems to me beyond the limits of good faith debate.
24 Q HOW CAN YOU BE SO SURE ON THIS POINT?
25 A Fortunately we have a long and detailed
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D. PESEAU Di 5
Potlatch Corporation
1 Commission record that has been accumulated over the
2 years regarding the Potlatch contract. This record
3 conclusively establishes the following facts:
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D. PESEAU Di 5a
Potlatch Corporation
1 1. At the inception of the Potlatch contract in
2 1991, its rates were approximately 8% above the
3 applicable tariff rate that Potlatch was otherwise
4 entitled to, and well above its cost of service.
5 2. Thereafter, Potlatch was subject to floor and
6 ceiling rates that escalated every year, while the
7 rest of Avista's customers saw no increases until
8 the Commission approved a 7.58% general rate
9 increase effective August 1, 1999.
10 3. By late 1999 when the Commission authorized a
11 general rate increase, the Potlatch contract was
12 generating a return that all three cost of service
13 studies conceded to be between 31% and 101% above
14 its cost of service!
15 Q HOW DO YOU KNOW THE POTLATCH RATE WAS WELL
16 ABOVE COST OF SERVICE AT ITS INCEPTION?
17 A Because the Commission held extensive
18 hearings on the contract in Case No. WWP-E-91-5, and all
19 parties, including the Commission staff in the person of
20 Keith Hessing, endorsed this view. In fact, the other
21 staff witness in that case, Thomas Faull, expressed
22 concern that the Potlatch rates might be sufficiently
23 above cost of service to warrant an undue discrimination
24 claim.
25 Given the steady contractual price escalations at
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D. PESEAU Di 6
Potlatch Corporation
1 a time when electric utility costs were generally flat or
2 decreasing, and given the 1999 cost of service results,
3 we can say with virtual certainty that Potlatch has paid
4 rates far in excess of its cost of service during the
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D. PESEAU Di 6a
Potlatch Corporation
1 entire duration of the contract, and it will almost
2 certainly continue to do so until the contract terminates
3 on December 31, 2001.
4 Q HOW DOES THIS RELATE TO THE ISSUE IN THIS
5 CASE?
6 A This record conclusively demonstrates that
7 Potlatch has paid its full share of depreciation on the
8 Centralia plant and more.
9 Q HOW DO YOU KNOW THIS?
10 A All cost of service studies, by definition,
11 include a component for depreciation. Since Potlatch has
12 clearly been paying more than its full cost of service,
13 we know that it has also paid its share of depreciation
14 for Centralia as well as other assets. This is not
15 simply a theoretical assertion. Examining the cost of
16 service studies prepared by Avista, the Staff, and
17 Potlatch in the 1999 rate case enables us to isolate the
18 depreciation expense as an identifiable component of cost
19 of service, per the following table:
20 Annual
Study Overall Rate of Rate of Return Depreciation
21 Sponsor Return From All From Potlatch Paid by
Rates Rates Potlatch
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Staff 7.27% 12.65% $416,680
23 Potlatch 6.94% 13.93% $416,564
Avista 9.45% 12.36% $434.872
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D. PESEAU Di 7
Potlatch Corporation
1 Q WHAT CONCLUSIONS DO YOU DRAW FROM THIS
2 EVIDENCE?
3 A These facts conclusively establish that the
4 Commission's rationale for authorizing customer
5 participation in the Centralia gain, which I have
6 referred to as the "depreciation reserve methodology",
7 applies with equal force to Potlatch during the term of
8 its existing contract
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D. PESEAU Di 7a
Potlatch Corporation
1 Q WHAT ABOUT THE PERIOD OF TIME PRIOR TO THE
2 EFFECTIVE DATE OF THE EXISTING CONTRACT?
3 A The Centralia plant has been in service
4 since 1971. During the first twenty years of the plant's
5 life, Potlatch paid tariff rates in the same manner as
6 other customers, and is therefore equally entitled to
7 share in the gain attributable to that period as well.
8 Q HOW DOES THIS EVIDENCE SQUARE WITH THE
9 AVISTA ARGUMENT THAT "THE RATES FOR POTLATCH ARE NOT
10 ENTIRELY BASED ON COST OF SERVICE RATEMAKING PRINCIPLES"?
11 A The statement is literally true, but very
12 misleading. This Commission, as well as most others with
13 which I am familiar, has for many years used cost of
14 service studies to guide it in establishing rates, but
15 never has it relied exclusively on cost of service. The
16 Potlatch contract, with rates well above cost of service,
17 illustrates this point.
18 The statement is nevertheless misleading because
19 it is clearly designed to suggest that Potlatch's rates
20 are below cost of service. As I have just demonstrated,
21 this implication is patently erroneous. This error was
22 greatly compounded on cross examination when Avista's
23 witness Mr. McKenzie insisted that the contract may have
24 been designed to recover little more than variable costs
25 and some small contribution to fixed costs. This
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D. PESEAU Di 8
Potlatch Corporation
1 misstatement was wildly wrong, but I don't think
2 Mr. McKenzie was being intentionally deceptive. I fear,
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D. PESEAU Di 8a
Potlatch Corporation
1 however, the Commission may have given some credence to
2 his assertions.
3 Q THIS IS SOMEWHAT BESIDE THE POINT, BUT WHY
4 DO YOU CONCLUDE THAT MR. MCKENZIE WAS NOT INTENTIONALLY
5 DECEIVING THE COMMISSION?
6 A If you had a background in the natural gas
7 industry of the 1990s, as Mr. McKenzie obviously does,
8 and if you were not familiar with the nomenclature used
9 by the electric industry in the 1980s, you could easily
10 make the same mistake. In the natural gas industry,
11 customers have the legal right to "bypass" the local
12 distribution company and take service directly from an
13 interstate pipeline. Since most large industrial
14 customers are located on or near a pipeline, the bypass
15 option gives them a great deal of negotiating leverage.
16 Consequently, it is not unusual for distribution
17 companies to negotiate industrial contracts that are far
18 below embedded cost of service. The rationale is that it
19 is better for the utility to recover its variable costs
20 (primarily the cost of gas) and some incremental
21 contribution to embedded cost, rather than lose the
22 customer completely.
23 I have attached an excerpt from the transcript as
24 Exhibit No. 206 that shows that Mr. McKenzie is clearly
25 under the impression that electric customers have the
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D. PESEAU Di 9
Potlatch Corporation
1 same option to bypass the local distribution system.
2 But this simply isn't so. In Idaho, customers have no
3 electric supply options other than the certificated
4 utility. Under these circumstances, utilities have no
5 incentive to negotiate a contract that
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Potlatch Corporation
1 does not recover the full embedded cost of service, and
2 even if they did the Commission would be unlikely to
3 approve a below cost contract.
4 In addition to his mistake of law, I suspect
5 Mr. McKenzie was further confused by references in the
6 1991 proceeding to the inclusion of some incremental
7 costs in the Potlatch rates. But in 1991, the term
8 incremental costs had a much different meaning in the
9 electric industry than its current usage in the natural
10 gas field. At the time, electric utilities had just
11 experienced nearly two decades of wildly escalating
12 generation costs. New power supplies were typically two
13 to three times embedded costs, and many Commission's,
14 including Idaho's, were experimenting with "marginal cost
15 pricing" by charging certain loads or customer groups
16 prices above embedded cost in order to reflect the higher
17 cost of incremental power supplies. It is in this sense
18 that the parties in the 1991 case characterized the
19 Potlatch contract as recovering some incremental costs.
20 This is quite clear if the transcript is read with an
21 understanding of the historical context. In other words,
22 the parties were discussing the fact that Potlatch's
23 rates were in excess of its fully allocated cost of
24 service rather than, as Mr. McKenzie apparently assumes,
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D. PESEAU Di 10
Potlatch Corporation
1 variable costs.
2 Q OK, WHERE DOES ALL THIS LEAVE US?
3 A We have answered the first two questions I
4 posed earlier. The Commission properly held that the
5 Idaho customers right to participate in the Centralia
6 gain arises as a result of their return of
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D. PESEAU Di 10a
Potlatch Corporation
1 Avista's capital in the form of depreciation payments for
2 the plant. Secondly, it is quite clear that Potlatch
3 paid its full share of this depreciation expense, both
4 before and after the 1991 contract was executed, and
5 therefore has the same entitlement to participate in the
6 gain as other ratepayers. As I stated earlier, the
7 evidence on this question is so overwhelming that I don't
8 see how a contrary position can be fairly argued.
9 Q ALRIGHT, LET'S TURN TO THE THIRD QUESTION
10 YOU POSED EARLIER. IS THERE ANYTHING IN THE POTLATCH
11 CONTRACT THAT WAIVES POTLATCH'S RIGHTS OR OTHERWISE BARS
12 ITS RIGHT TO PARTICIPATE IN THE CENTRALIA GAIN.
13 A No.
14 Q DO YOU HAVE TO "INTERPRET" THE CONTRACT TO
15 REACH THIS CONCLUSION?
16 A Not in the sense you are suggesting. My
17 conclusion is based on a straightforward reading of the
18 contract with some knowledge of its historical context
19 and prior Commission proceedings.
20 Q STARTING WITH THE HISTORICAL CONTEXT, HOW
21 DID THE POTLATCH CONTRACT ARISE?
22 A I will try to make a very long and tortuous
23 story relatively succinct. In the late 1970s and early
24 1980s, Potlatch installed a series of cogeneration
25 facilities at its Lewiston mill. At the time it was
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D. PESEAU Di 11
Potlatch Corporation
1 taking service from Washington Water Power ("WWP")
2 pursuant to a contract that incorporated Schedule 25
3 rates. After extended negotiations,
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D. PESEAU Di 11a
Potlatch Corporation
1 WWP agreed to purchase the output of Potlatch's
2 cogeneration facilities as required by the Public
3 Utilities Regulatory Policy Act ("PURPA"). The Idaho
4 Commission approved this PURPA contract, but it was
5 subsequently rejected by the Washington Utilities and
6 Transportation Commission. The parties then negotiated a
7 second agreement, which was approved by Washington but
8 rejected in Idaho.
9 Toward the end of this decade-long struggle, WWP
10 filed an amendment to its tariff that required loads in
11 excess of 25 megawatts to be served under a special
12 contract. Potlatch intervened in protest in the
13 Commission proceedings on this proposal. This
14 intervention was ultimately mooted when the 1991
15 agreement was approved.
16 Q COULD YOU BRIEFLY SUMMARIZE THE NATURE OF
17 THE 1991 CONTRACT?
18 A In essence, it is a two pronged agreement
19 that provides for the simultaneous sale of cogenerated
20 power to WWP and the purchase of both firm and
21 interruptible power by Potlatch.
22 Q DO YOU AGREE THAT "POTLATCH IS NOT SUBJECT
23 TO PRICE ADJUSTMENTS (EITHER INCREASES OR DECREASES)"?
24 A This statement is inaccurate and misleading
25 on two grounds. First, both the purchase and sale rates
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Potlatch Corporation
1 have been subject to increases in each and every year
2 since 1992. These increases are summarized in the
3 contract exhibits attached to my testimony as Potlatch
4 Exhibit No. 207.
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Potlatch Corporation
1 But even more to the point is the fact that the
2 contract does not expressly bar Commission ordered price
3 adjustments, nor could it have legally done so even if
4 the parties had so desired. A utility and its customer
5 cannot lawfully contract away the Commission's continuing
6 regulatory jurisdiction, nor can the Commission surrender
7 that jurisdiction by approving a contract. It is true
8 that a contract that establishes prices for a specified
9 term cannot, in the absence of a savings clause, be
10 adjusted as a matter of course in general rate
11 proceedings. But both the contract terms and prices are
12 always subject to revision by the Commission if it
13 becomes adverse to the public interest or otherwise works
14 a manifest injustice. Keith Hessing's testimony in the
15 1991 contract approval case, Case No. WWP-E-91-5, nicely
16 summarizes the distinction between the so-called "tariff"
17 and "contract" standards of ratemaking, and I have
18 attached the relevant section of his testimony as Exhibit
19 No. 208.
20 Q IS IT CLEAR THAT THE CONTRACT STANDARD
21 GOVERNS THE POTLATCH CONTRACT?
22 A The Staff clearly assumed so in the 1991
23 proceedings. It is likewise clear that the contracting
24 parties regarded Potlatch's acceptance of scheduled
25 annual rate increases in lieu of general rate adjustments
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Potlatch Corporation
1 as an integral part of their "deal." But the contract
2 did not attempt to bind the Commission to this deal. The
3 relevant contractual provision is unique in my
4 experience, and it incorporates a subtle, but crucial,
5 departure from the contract standard discussed by
6 Mr. Hessing:
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D. PESEAU Di 13a
Potlatch Corporation
1 COMPLIANCE WITH LAWS. Both parties shall comply
with all applicable laws and regulations of
2 governmental agencies having jurisdiction over the
Facility and the operations of the Parties. In
3 the event that any regulatory commission or agency
having jurisdiction over the operation of the
4 Facility, imposes new or changed regulations or
policies which affect the rates contained in this
5 Agreement, or if the payments by WWP to Potlatch
under this Agreement are partially or totally
6 disallowed as recoverable costs in the retail
rates of WWP in Idaho or Washington, either Party
7 shall have the right, for a period of one hundred
twenty (120) days from the effective date of such
8 new or changed regulations, to terminate this
Agreement.
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10 Q WHY DO YOU SAY THIS PROVISION IS UNIQUE?
11 A Because it does not specify either a
12 contract or tariff standard for changing rates. Instead
13 it simply provides that, if the Commission alters the
14 pricing arrangement, either party can terminate the
15 contract within 120 days. Potlatch's witness, Bill
16 Nicholson, aptly summarized this situation in his
17 testimony in Case No. WWP-E-91-5:
18 [T]he Commission is left with a choice to which,
in this case, the parties to the agreement have a
19 choice. Very candidly, if there is a significant
disturbance of this contract... the parties to it
20 would take probably a very serious look at whether
or not they wish to exercise their rights under
21 the contract.
22 Case No. WWP-E-91-5 Tr. At 155.
23 Q SO WHAT IS THE ANSWER TO YOUR THIRD
24 QUESTION? DID POTLATCH WAIVE ITS RIGHT TO PARTICIPATE IN
25 THE CENTRALIA GAIN?
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1 A It did not. The agreement between Potlatch
2 and WWP contemplated that the scheduled prices would not
3 be altered in general rate cases. If
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1 the Commission intervenes to alter this deal, either
2 party can terminate the agreement. I see nothing in this
3 arrangement that affects the issue in this case.
4 Q WOULD YOU PLEASE EXPLAIN?
5 A Obviously neither of the parties to the
6 contract foresaw in 1991 the possibility that electric
7 generation would be partially deregulated or that WWP
8 would sell a generating plant to an Exempt Wholesale
9 Generator. I have confirmed this conclusion with
10 Potlatch's representatives, but it is obvious on the face
11 of the document. If the parties had anticipated this
12 situation, they likely would have addressed it in the
13 agreement, probably by a mutual reservation of rights.
14 Since the parties did not explicitly address this
15 situation, the only remaining question is whether
16 Potlatch's entitlement is extinguished by the agreement
17 to exchange scheduled price changes for rate case
18 protection. In my view, this arrangement clearly has no
19 bearing on the case at hand.
20 Q WHY NOT?
21 A Because this case has nothing to do with
22 changes to rates. The predicate on which the
23 Commission's decision rests is that ratepayers in effect
24 "bought" a portion of the Centralia plant from Avista by
25 paying depreciation costs. When the plant is sold, the
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1 ratepayers are therefore entitled to a return of their
2 investment plus a pro rata share of the profits from the
3 sale. As it happens, the Commission chose
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1 (wrongly in my view) to implement this payment by
2 reducing customers' rates over a period of years. But it
3 could just as easily have ordered the utility to issue
4 each ratepayer a check or billing credit for its share of
5 the proceeds. If it had chosen this course, it would be
6 much clearer that the ratemaking provisions of the
7 contract are irrelevant.
8 This point is so crucial it bears reemphasis.
9 Avista's rates did not change because of any change in
10 underlying costs or ratemaking methodology. They changed
11 only because Avista sold property that belonged in part
12 to its customers, and it was therefore obliged to pay the
13 customers in accordance with their ownership interests.
14 The Commission's incorporation of the payment in rates
15 does not alter the fact it is nothing more nor less than
16 a distribution of proceeds from the sale of the
17 customers' property. Potlatch's rates, however
18 established, therefore have absolutely no bearing on its
19 right to recover the sum attributable to the sale of
20 "its" property.
21 Q ARE THERE ANY OTHER MATTERS THE COMMISSION
22 SHOULD CONSIDER IN THIS CASE?
23 A Yes. Basic standards of justice and equity
24 are also at issue here. The Commission calculated the
25 size of the customer credit by summing the total
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1 Centralia depreciation paid by all Idaho customers,
2 including Potlatch. It then distributes the proceeds by
3 allocating the total, including Potlatch's payments,
4 among all customers other than Potlatch. If the
5 Commission stands by the original decision, it is
6 basically confiscating property that Potlatch "bought"
7 and distributing
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1 it to parties who have no legitimate claim to the
2 resulting windfall. This is not only irrational, it is
3 also inequitable and unjust.
4 Q WHAT IS THE APPROXIMATE ALLOCATION OF THE
5 $6,811,624 IDAHO CUSTOMERS GAIN THAT POTLATCH WOULD
6 RECEIVE IF THE COMMISSION INCLUDES IT IN THE PRO RATE
7 GAIN DISTRIBUTION?
8 A I estimate Potlatch's share of the gain to
9 be approximately $408,000, or $51,000 per year for the 8
10 year period, as shown on my Exhibit No. 209.
11 Q HOW SHOULD THIS AMOUNT BE PAID TO POTLATCH?
12 A There is really no defensible reason to
13 allow Avista to retain proceeds to which it is not
14 entitled. Consequently, I recommend that the entire sum
15 of $332,195 be paid to Potlatch when the sale closes,
16 either by a check or in the form of a billing credit. If
17 for some reason the Commission feels that payment should
18 match the 5 year payout to other customers, then the
19 simplest distribution method would be an annual payment
20 or billing credit in the amount of $51,000 plus interest.
21 Q DOES THIS CONCLUDE YOUR TESTIMONY?
22 A Yes.
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1 (The following proceedings were had in
2 open hearing.)
3
4 DIRECT EXAMINATION
5
6 BY MR. WARD: (Continued)
7 Q Now, Dr. Peseau, did you also file rebuttal
8 testimony in this proceeding?
9 A Yes, I did.
10 Q And were there any exhibits to the rebuttal
11 testimony?
12 A No.
13 Q And do you have any corrections or changes
14 to make to that rebuttal testimony?
15 A No, I don't.
16 Q And if I asked you the questions contained
17 therein this morning, would your answers be as given?
18 A Yes, they would.
19 MR. WARD: With that I'd request that
20 Dr. Peseau's rebuttal testimony be spread on the record
21 as if read.
22 MR. DAHLKE: And we would enter an
23 objection on behalf of Avista to the rebuttal testimony
24 as not called for in the noticed proceeding. We just
25 received it this morning and believe that the arguments
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1 that Potlatch intended to present should have been
2 presented in the direct testimony.
3 COMMISSIONER SMITH: Mr. Woodbury, do you
4 have any opinion on this or objection?
5 MR. WOODBURY: Mr. Ward had contacted me
6 earlier and I said that I didn't have any objection with
7 respect to rebuttal testimony on Staff's.
8 COMMISSIONER SMITH: Any reply, Mr. Ward?
9 MR. WARD: Yes, Madam Chair. I think it's
10 correct to characterize the procedural rules, which I
11 recognize don't entirely apply here, can be summarized as
12 follows: that surrebuttal may be a matter of grace
13 granted by the tribunal, but rebuttal, I believe, is
14 generally thought of as a matter of right. I do
15 apologize for the late filing, but I'd like to point out
16 that we were in something of a time bind.
17 The Commission's notice provided for
18 service on us of Staff and Company testimony on the 15th
19 of June. I received Mr. Lobb's testimony on the 14th,
20 which was last Wednesday. I received Avista's testimony
21 at the close of business on Thursday the 15th and
22 Mr. Dahlke was -- apparently, we had a failure of
23 overnight service and Mr. Dahlke was kind enough to
24 scurry around and get me a copy, but that meant we had
25 only three working days by the Commission's timetable to
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1 prepare rebuttal after we saw the testimony and since
2 Dr. Peseau was out of town that week, effectively it was
3 two days, Monday and Tuesday of this week, so we did it
4 as quickly as we could. I faxed Mr. Dahlke a rough draft
5 of the testimony last night, but I don't see how we could
6 legitimately be required to act more expeditiously.
7 COMMISSIONER SMITH: The Commission will go
8 at ease for a few minutes and take the objection under
9 consideration and then we'll return.
10 (Pause in proceedings.)
11 COMMISSIONER SMITH: We'll be back on the
12 record. The Commission has taken Mr. Dahlke's objection
13 under consideration and denies it at this time, believing
14 that Potlatch has the burden of proof in this case, this
15 is their reconsideration, and they would have the
16 opportunity for live rebuttal at the conclusion, so the
17 fact that they did it in writing and are going to put it
18 on first is okay and, Mr. Dahlke, if you need more time,
19 we'd be happy to recess further to allow you additional
20 opportunity to review it and prepare cross.
21 MR. DAHLKE: Thank you.
22 COMMISSIONER SMITH: Mr. Ward? Oh, then,
23 we will then spread the prefiled rebuttal testimony of
24 Dr. Peseau on the record as if read.
25 (The following prefiled rebuttal
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1 testimony of Dr. Dennis Peseau is spread upon the
2 record.)
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1 Q Please state your name and business
2 address.
3 A My name is Dennis E. Peseau. My business
4 address is 1500 Liberty Street, S.E., Suite 250, Salem,
5 Oregon 97302.
6 Q By whom are you employed and in what
7 capacity?
8 A I am the President of Utility Resources,
9 Inc., ("URI").
10 Q Are you the same Dennis Peseau who prefiled
11 rehearing testimony earlier in Case No. AVU-E-99-6?
12 A Yes.
13 Q What is the purpose of this testimony?
14 A I am providing brief rebuttal to Staff's
15 and Avista's rehearing testimony.
16 Q On page 3 of his rehearing testimony,
17 Mr. McKenzie states that Potlatch's is not entitled to
18 participate in the Centralia gain because its "rates have
19 nothing to do with the recovery of Centralia
20 depreciation." Do you agree?
21 A No. Potlatch's contract has a demand
22 component that recovers all fixed costs, including
23 capacity costs with depreciation, as well as an energy
24 component. Both demand and energy rates include some
25 marginal or incremental costs and are therefore priced
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Potlatch Corporation
1 above Avista's embedded costs to serve Potlatch.
2 Q Mr. McKenzie also characterizes the
3 contract's energy rates as "market based energy rates"
4 (P.3, L.17). Is this correct?
5 A No. As the contract clearly states, the
6 energy rate is equal to Avista's incremental variable
7 cost. On occasion this will equal the variable cost
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1 component of market rates, but it is clearly wrong to
2 mischaracterize these energy rates as "market based".
3 Q Leaving aside the mischaracterization,
4 Mr. McKenzie suggests that prior cost of service studies
5 underestimated Potlatch's costs because they should have
6 assigned market based energy costs to Potlatch. Is this
7 correct?
8 A No. Mr. McKenzie is confusing prices and
9 revenues with costs. A cost of service study has to
10 compare revenues to embedded costs to be meaningful. If
11 we assigned to each customer a cost equivalent to the
12 prices actually paid as Mr. McKenzie suggests, the result
13 is gibberish. In that event, revenues would always equal
14 costs regardless of the utility's real underlying cost of
15 service. All customers would be exactly at cost in every
16 instance, with no deviation possible.
17 Q Can you provide an example that illustrates
18 the difference between prices and costs for cost of
19 service purposes?
20 A Yes. Fortunately, there is a perfect
21 example from the Commission's recent history. The pre
22 1997 FMC contract priced its interruptible block of power
23 based on the Valmy plant's incremental costs. But no one
24 suggested that these incremental costs should actually be
25 assigned as FMC's costs in cost of service studies.
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Potlatch Corporation
1 Instead, the cost studies all used fully allocated
2 embedded costs to determine FMC's share of the utility's
3 total cost of service.
4 Q What does all this have to do with the
5 recovery of depreciation costs?
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1 A Virtually nothing. I am just correcting
2 Mr. McKenzie's errors lest they cause confusion. What
3 Mr. McKenzie fails to grasp is that we can set pricing
4 components with embedded costs, incremental costs, or a
5 ouiji board, but the ultimate question is whether the
6 price components cover fully allocated costs including
7 depreciation. In the present case, Potlatch's payment
8 clearly exceeded its cost of service throughout the
9 contract, and it is therefore obvious that it paid its
10 fair share of depreciation costs including Centralia's.
11 It is worth noting that Mr. Lobb concurs.
12 Q Mr. McKenzie also suggests that Potlatch
13 has recovered any Centralia depreciation payments in
14 revenues from energy sales to Avista. Do you agree?
15 A No, the suggestion is ridiculous. Avista
16 has an obligation to purchase Potlatch's cogeneration
17 under federal law. That obligation has no relevance to
18 Potlatch's entitlement to a recapture of its Centralia
19 investment.
20 Q Is Mr. McKenzie's calculation of Potlatch's
21 share of the gain correct?
22 A If the Commission allows Potlatch to recoup
23 its share of the gain as a lump sum, I agree with
24 Mr. McKenzie's calculation.
25 Q Have you also read Mr. Lobb's rehearing
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1 testimony?
2 A Yes.
3 Q Do you agree with his conclusions?
4 A If we go back to the three questions I
5 posed in my initial rehearing testimony, Mr. Lobb and I
6 are in complete agreement on the first two.
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1 First, we agree that it is the payment of depreciation
2 that establishes the customers' right to participate in
3 the gain on sale. Second, we agree that Potlatch has
4 paid its fair share of Centralia depreciation. But we
5 disagree on two remaining issues.
6 Q What is the first area of disagreement?
7 A Mr. Lobb states, on P. 6, L. 18-21,
8 that "... The depreciation reserve methodology provides
9 the rationale to quantify general customer entitlement
10 but it does not necessarily specify which ratepayers are
11 entitled to participate." In support of this statement,
12 he points out that customers who have left Avista's
13 system don't receive their prorata share of the gain.
14 Q Is Mr. Lobb correct on this point?
15 A He is correct that departed customers do
16 not benefit, but the observation doesn't justify his
17 conclusion that Potlatch can be legally deprived of its
18 right to participate.
19 Q Why not?
20 A In the first place, Potlatch has not left
21 Avista's system, so that still leaves it in the position
22 of being the only existing customer who is denied the
23 right to participate. Consequently, the discrimination
24 issue doesn't go away as Mr. Lobb implicitly suggests.
25 Secondly, the reason why we don't award a portion
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1 of the gain to departed customers is simply due to
2 administrative feasibility. If we were to do perfect
3 justice we would have to track down millions of prior
4 customers (and their heirs) and calculate each of their
5 entitlements
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1 based on their individual consumption and years on the
2 system. This is literally impossible, so the award is
3 confined to existing customers because that is the only
4 practical remedy.
5 Q What is the second difference you have with
6 Mr. Lobb?
7 A In my direct testimony, I argued that the
8 Avista/Potlatch contract is irrelevant because the
9 question here is one of ownership rights that have
10 nothing to do with rates or ratemaking. Potlatch is an
11 equitable owner of property that has been sold, and it is
12 entitled to compensation in the same manner as all other
13 owners. In addition, I point out that even if the
14 contract is mistakenly deemed relevant, it does not
15 prohibit Potlatch's participation in the gain. It is not
16 a "contract standard" agreement in the sense Mr. Lobb
17 suggests. It does not expressly impose a "contract
18 standard" but simply provides that the parties can
19 terminate the contract if the Commission intervenes. If
20 one reads the transcript of the 1991 hearing, it is clear
21 that the Commissioner who was most concerned about this
22 issue understood this nuance.
23 Q Is there anything else in the Staff's
24 argument you find troubling?
25 A I find it interesting that Staff is
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D. PESEAU Di 6
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1 concerned that paying Potlatch its proceeds from the
2 Centralia sale changes the nature of the parties'
3 contractual bargain, but it does not seem at all troubled
4 by the fact that approving the sale itself effectively
5 changes the nature of the underlying agreement.
6 Q Please explain?
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1 A Obviously, the removal of Centralia from
2 Avista's resource stack removes capacity that was
3 included in the calculation of Potlatch's demand charges.
4 This removes capacity Potlatch contracted for, and is
5 paying for, in its demand rates. In addition, as I noted
6 earlier, Potlatch's energy rates are based on Avista's
7 incremental variable costs, so the removal of Centralia
8 from the Avista resource stack tends to increase
9 Potlatch's energy costs as well. Consequently, the
10 Commission, by approving the sale at Avista's urging, has
11 already changed the nature of the parties' bargain to
12 Potlatch's detriment.
13 But on the flip side of the coin, Avista and the
14 Staff urge the Commission to confiscate the proceeds from
15 the sale of Potlatch's property, and distribute it to
16 other ratepayers who have no conceivable claim to it, all
17 in the name of avoiding impacts on the contractual
18 agreement between the parties. This seems to me not so
19 much an analysis of the issues as a search for a
20 rationale to deny Potlatch a benefit to which it is
21 entitled as a matter of justice and equity. I also think
22 the suggested result is "adverse to the public interest".
23 Q Why is this important?
24 A Even under Mr. Lobb's interpretation, the
25 Commission can intervene in a contract if necessary to
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1 prevent a result that is "adverse to the public
2 interest". Isn't the confiscation of property that
3 rightfully belongs to another adverse to the public
4 interest? I have to believe if the shoe were on the
5 other foot, and Potlatch was receiving the windfall
6 benefit from proceeds that rightfully belong to the other
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1 ratepayers, the Staff would have no trouble concluding
2 that such a manifest injustice is adverse to the public
3 interest.
4 Q Does this conclude your testimony?
5 A Yes.
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1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: And I assume he's
4 available for cross or is there further?
5 MR. WARD: I want to ask one additional
6 question. In view of the speed with which we were
7 preparing this, in reading this testimony over, and I'm
8 referring to the rebuttal testimony, in reading this over
9 this morning, it occurred to us that one point may not be
10 clear, so I want to clarify that, if I may.
11
12 DIRECT EXAMINATION
13
14 BY MR. WARD: (Continued)
15 Q Dr. Peseau, in your rebuttal testimony, you
16 deal with the subject of Mr. McKenzie's characterization
17 of Potlatch's energy rates as market based. Do you
18 recall that testimony?
19 A Yes, I do.
20 Q And you explain why they're not. What
21 provisions of the contract did you have in mind when you
22 formed your explanation?
23 A The definitions of incremental cost and the
24 related concepts of system avoided energy rate underlie
25 my arguments that the contract calls for first
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Wilder, Idaho 83676 Potlatch Corporation
1 incremental cost which can be system avoided cost which
2 can be either system resources or market prices, so I'm
3 referring to pages 3 and 5 of the contract which contain
4 those definitions to establish that the energy rate is
5 not based upon a market price.
6 MR. WARD: Madam Chair, the contract is
7 already in evidence; however, I passed out pages 3 and 5
8 which contain the relevant provisions which are on
9 page 5, the system avoided energy rate. If you review
10 that definition and then go to the incremental cost
11 definition on the page 3, you will see how the
12 determination of Potlatch's energy rate and its variable
13 rate applies.
14 COMMISSIONER SMITH: Okay, thank you.
15 MR. WARD: With that clarification, I think
16 Dr. Peseau is ready for cross-examination.
17 COMMISSIONER SMITH: Thank you.
18 Mr. Woodbury, do you have any questions?
19 MR. WOODBURY: I do, Madam Chair.
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1 CROSS-EXAMINATION
2
3 BY MR. WOODBURY:
4 Q Good morning, Dr. Peseau.
5 A Good morning.
6 Q Looking at your direct testimony on page 5,
7 you speak of the long and detailed Commission record with
8 respect to the Potlatch contract. Are you referring to
9 the Commission's record established in the Water Power
10 E-91-5 case? That was the underlying case where the
11 Commission approved the contract.
12 A Yes, I am.
13 Q Did you participate in that case?
14 A I didn't testify. I couldn't tell you
15 whether our firm participated or not.
16 Q Did you participate in negotiation of the
17 contract?
18 A No, I don't recall that.
19 Q Have you reviewed the filings of record in
20 that case, including the transcript?
21 A Yes.
22 Q Are you referring to with respect to
23 Commission record any other records with respect to the
24 long and detailed Commission record?
25 A No. Other than the contract itself, no.
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Wilder, Idaho 83676 Potlatch Corporation
1 Q On page 7 of your testimony, you state the
2 record conclusively demonstrates that Potlatch has paid
3 its full share of depreciation on the Centralia plant and
4 more.
5 A Yes.
6 Q Can you direct my attention to the Potlatch
7 contract section expressly dealing with recovery of cost
8 of service in rates?
9 A In the contract, yes.
10 Q And the contract in the underlying case was
11 Exhibit 204; is that correct?
12 A Yes, it was. I'll have it here in a
13 moment, thanks.
14 Q When you refer to record in that case, were
15 you referring to the contract or were you referring to
16 something else?
17 A I believe I indicated, if I understand your
18 question, you asked if it was the transcript and asked if
19 there was anything else and I said other than the
20 contract, I believe the transcript is --
21 Q No, with respect to the language that you
22 have on page 7 of your direct, you say the record
23 conclusively demonstrates that Potlatch has paid its full
24 share of depreciation, were you referring to particular
25 language within the contract itself or are you referring
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1 to cost of service testimony in the Company's last rate
2 case?
3 A I'm referring to the contract, I'm
4 referring to discussions in the transcript describing
5 those conditions and, finally, the table I set out in my
6 testimony.
7 Q All right. You're not referring to
8 anything that's not included in your testimony?
9 A Well, there are discussions in the
10 transcript which describe how the various components of
11 rates contained in Exhibit 204 cover the embedded cost of
12 service, plus additional fees, so I guess I am referring
13 to more than just the contract and the cost of service
14 studies.
15 Q Page 9 of your testimony, you state that in
16 Idaho, customers have no electric supply options other
17 than the certificated utility.
18 A Yes.
19 Q Would you consider a supply option as being
20 a customer's ability to self-generate?
21 A That's a possibility, depending on the
22 economics.
23 Q Potlatch does have the ability to
24 self-generate with its Lewiston plant, doesn't it?
25 A Not under the contract.
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Wilder, Idaho 83676 Potlatch Corporation
1 Q So none of its generation capability is
2 serving its own load in Lewiston; is that what you're
3 saying?
4 A Pardon me?
5 Q None of Potlatch's generation capability is
6 serving its own load?
7 A Yes, it is, but to the extent it's serving
8 its own load, it's not available to serve any incremental
9 load.
10 Q But as a generic statement, a customer that
11 has generation capability has some options other than
12 just the certificated utility, you agreed to that?
13 A Well, yes, I did. Of course, a
14 certificated utility has some control over interconnects
15 and things that are required practically to
16 self-generate, but strictly speaking, I don't quibble
17 with the fact that under the right set of circumstances
18 it's possible to locate a generation facility on a --
19 Q And if the company had that capability and
20 had the capability of bringing on an additional
21 generation unit, does it not have any leverage in
22 negotiating a price for purchase?
23 A It does to some extent, but usually the
24 terms of the interconnect and standby and reserve
25 capacity, the influence that the neighboring or incumbent
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1 utility has on that usually outweighs any negotiation
2 power, as I would point out happened in the 1991
3 negotiations.
4 Q And why do you say that happened in the '91
5 negotiations?
6 A Well, despite the fact that Potlatch had
7 generation facilities available to it, it ended up with a
8 contract that was above the tariffed contract, that the
9 prices were above the tariffed contract that it had
10 presumably as an option and, secondly, Potlatch was
11 required to reduce its levelized sale rate back to Water
12 Power of some 20 percent in order to get the contract
13 consummated.
14 Q The contract that the parties negotiated is
15 a purchase and sale contract?
16 A That's correct.
17 Q And those components of the contract were
18 inextricably tied; would you agree?
19 A Yes, I think there's testimony of
20 Mr. Hessing to that effect, that he would prefer that
21 they weren't, but in fact the long history, the ten-year
22 history, of attempted negotiations seem to require that
23 they go part and parcel with one another.
24 Q On page 11 of your direct testimony, you
25 ask yourself, "Is there anything in the Potlatch contract
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1 that waives Potlatch's rights or otherwise bars its right
2 to participate in the Centralia gain?" And you answer
3 "No."
4 Is there any specific language that
5 entitles Potlatch to a share of the Centralia gain?
6 A Well, as I say in my rebuttal, there was no
7 anticipation of utility --
8 Q The answer is no?
9 A The answer is that the contract is silent
10 on that issue.
11 Q Okay, were there any -- looking at the
12 contract, were there any collateral or side agreements
13 that were not presented in the underlying case for
14 contract approval?
15 A I have a vague recollection that there was
16 some language or this could have been the transcript that
17 referred to a separate agreement for another matter, but
18 that's as specific as I can be.
19 Q And the other matter dealing with what?
20 A I don't recall.
21 Q But you have had conversations with the
22 principals to the negotiation for Potlatch?
23 A Yes, I have.
24 Q And as a result of those conversations,
25 you're unaware of any collateral or side agreements?
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1 A That impact the rights with respect to the
2 Centralia gain?
3 Q Yes.
4 A No, I would have probably included it as an
5 exhibit if I had it.
6 Q When you speak of the historical context
7 for negotiation of the underlying agreement --
8 A Where are we?
9 Q Page 11.
10 A Thanks.
11 Q Yeah, page 11.
12 A Yes.
13 Q -- that historical context was an attempt
14 to obtain two PURPA contracts that for different reasons
15 were rejected by the Washington and Idaho commissions?
16 A That's certainly --
17 Q Is that part of the context that you're
18 referring to?
19 A That was part of it and then The Washington
20 Water Power was in a sense holding a gun to Potlatch's
21 head with respect to filing a provision with the
22 Commission that would not allow Potlatch to take tariffed
23 power off the designated schedule, that's the 25-megawatt
24 limit, in which case Potlatch was out of -- would have
25 been precluded the ability to take off the designated
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1 service Schedule 25.
2 Q And if the parties were unable to reach
3 agreement on a special contract, how would the company
4 have been served?
5 A I don't know. It depends on the outcome of
6 the 25-megawatt provision. Absent that, they presumably
7 had the right to resume service off Schedule 25 and I
8 presume that's the reason why the whole provision, the
9 25-megawatt provision, was filed, to take that option
10 away.
11 Q Page 13 of your direct testimony, you
12 state, "The contract does not expressly bar Commission
13 ordered price adjustments." Does the contract by
14 implication bar Commission ordered price adjustments?
15 A No.
16 Q And was it the understanding of the parties
17 that there would be adjustments during the ten-year
18 period of the contract?
19 A That there would be? I don't think they
20 were -- there were no designated changes, but at least in
21 the transcript, Commissioner Miller was very concerned
22 that the Commission was giving that right, jurisdictional
23 right, up and at least at the end of that colloquy, and I
24 think it was a redirect of Mr. Ward, Mr. Miller seemed to
25 understand or at least said he felt better about that and
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1 I took that to mean that he understood that there were
2 opportunities to do so; however, there would be
3 ramifications to doing that.
4 Q Well, with respect to Potlatch's
5 understanding, didn't Mr. Nicholson testify, "What we
6 have here is a contract that we would believe would be in
7 place for ten years and the Commission would not be
8 concerned with it in that time frame"?
9 A With respect to rates, I think that's
10 right.
11 Q With respect to rate adjustments that have
12 come about within that ten-year period, power cost
13 adjustment rebates and surcharges, demand side management
14 tariff rider, would it be your testimony that it would
15 have been reasonable for the Commission to make those
16 adjustments applicable to Potlatch?
17 A I think that would have been very fair in
18 the negotiations to do that provided you didn't saddle
19 Potlatch with a higher than cost of service rate to begin
20 with and incremental rates which were higher than
21 embedded costs on all the fixed cost components and then
22 provide for an automatic escalation in its energy rate,
23 because in retrospect --
24 Q That interpretation, though, is really not
25 reflected in the record below, is it?
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1 A Sure it is. Mr. Prekeges talked about why
2 the contract was good. Absent the contract, the
3 ratepayers in Idaho were looking at a substantial rate
4 increase. Mr. Prekeges talks about the cost of service
5 principles by which each of the rate components for the
6 Exhibit 204 contract were made and indicated that the
7 ratepayers were avoiding any rate increase as a result of
8 that, so all of that, I think, went -- was considered at
9 the time; otherwise, I think Potlatch, from my review
10 Potlatch, would have been better off staying on
11 Schedule 25 and selling its power on PURPA contract.
12 Q Would you agree that any adjustment to the
13 rates and the revenue under the Potlatch agreement with
14 Avista would trigger rights on behalf of either Potlatch
15 or Avista to terminate the contract?
16 A If the Commission attempted to change a
17 general rate within the contract, I think that would
18 trigger. That's not what this proceeding is all about.
19 It's about return of an equity interest in a plant.
20 Q That's your interpretation, I think,
21 whether this affects rates or not.
22 A I guess it's my interpretation.
23 Q Page 13 of your testimony, testimony with
24 respect to contract standard and the question that you
25 ask, "Is it clear that the contract standard governs the
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1 Potlatch contract?"
2 And you state, "The Staff clearly assumed
3 so in the 1991 proceedings," and yet it seems to be your
4 testimony that Staff was wrong in its assumption.
5 A No, I said assumed so. If one looks at the
6 testimony of Staff in that case, Staff clearly recognizes
7 that there were different considerations, as you've just
8 pointed out, in this single contract and it dealt with
9 the purchase agreement from Water Power and the sale back
10 to Water Power and Mr. Hessing, for example, said that
11 certainly the sale to Water Power was not a tariff,
12 couldn't be a tariff consideration, while he preferred
13 that the purchase would have been a tariff and as I
14 understand his testimony, it was the fact that there was
15 a commingling which precluded a tariff schedule and,
16 therefore, the default was a contract.
17 Now, the fact that it was not a tariff I
18 don't think opens the door to say that everything that is
19 not a tariff is a contract standard or at least not a
20 typical contract standard.
21 Q But the Commission had historical practice
22 of treating things as tariff standard or contract
23 standard and it was the company's preference that the
24 Commission treat this under the contract standard which
25 required essentially leaving the contract in place for
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1 the ten-year contract term.
2 MR. WARD: Madam Chair, can I have a
3 question in there somewhere?
4 MR. WOODBURY: Is there a question?
5 COMMISSIONER SMITH: I think that's
6 Mr. Ward's comment, Mr. Woodbury, is there a question?
7 MR. WOODBURY: I thought I had started it
8 with a question, but there's a question someplace.
9 Q BY MR. WOODBURY: Let's explore this a
10 little more. You indicate that what was presented, what
11 the Commission is presented with in the Potlatch
12 agreement contains paragraph 21 which is a subtle, but
13 crucial, departure from the contract standard.
14 A Yes. With respect to other contracts that
15 I've been familiar with, it's quite different.
16 Q And it essentially allowed the contract
17 parties the opportunity to terminate should there be any
18 adjustment by the Commission of the contract rates.
19 A I guess I interpret it, it gives the
20 Commission the opportunity to change rates if it so
21 chooses with the resulting potential for contract
22 termination.
23 Q If we were not talking about a gain, but
24 were instead talking about a loss with respect to
25 Centralia, in fact, something that was envisioned by
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1 Mr. Nicholson as being perhaps improbable, but the
2 destruction of one of the company's generation resources,
3 would Potlatch be in here arguing the equity of sharing
4 that loss?
5 A I don't know what it would be in here
6 arguing, but certainly, it's very clear from the contract
7 provisions that if a plant went off line for any length
8 of time or indeed, if the company did sell Centralia,
9 which it's done, that Potlatch is affected. Its very
10 energy rate is based upon the resource stack that was
11 evident in 1991 and today and selling a facility or
12 losing a facility affects Potlatch. It increases its
13 rates.
14 Q And if the company were to recover that
15 loss through a surcharge, but instead, as Potlatch argues
16 in this case, wants just a one-time check, could it have
17 requested a check from Potlatch in the amount and not
18 triggered the rights of termination under the agreement?
19 A If there's a legal basis to charge Potlatch
20 in that case and it didn't go -- to me, it wouldn't need
21 to go through the exercise of trying to make it into a
22 rate. Whatever its legal rights are, it could exercise
23 and if the equity is negative, then I suppose there's an
24 argument there.
25 Q You state that the agreement between
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1 Potlatch and Water Power contemplated that the scheduled
2 prices would not be altered in general rate cases. Does
3 the agreement specifically state that? Do agreements
4 contemplate -- I mean, don't they come right out and say
5 it?
6 COMMISSIONER SMITH: Mr. Woodbury, why
7 don't we let him answer the first question before you
8 start a new one.
9 THE WITNESS: I'm sorry, I was listening to
10 the second question. I lost track of the first one.
11 Q BY MR. WOODBURY: Does the agreement
12 specifically state that?
13 A That the Commission will not --
14 Q That the scheduled prices will not be
15 altered in general rate cases.
16 A I don't recall that language.
17 Q And when you say that the agreement
18 contemplates that, are you referring to what, then?
19 A Well, you referred me to the testimony of
20 Mr. Nicholson. The contract contemplated general
21 parameters for pricing which were somewhat known and
22 built in any, you know, negotiated escalations and so
23 forth to act in lieu of any general rate case. That's my
24 interpretation of it.
25 Q On page 15 of your testimony, you state
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1 that obviously, neither of the parties to the contract
2 foresaw in 1991 the possibility that electric generation
3 would be partially deregulated or that Water Power would
4 sell a generating plant and I've confirmed that
5 conclusion with Potlatch's representatives. Which
6 representatives are you referring to?
7 A I know it was Mr. Ward.
8 Q Mr. Ward is Potlatch's attorney in this
9 case?
10 A Yes.
11 Q That's who you spoke with? Did you speak
12 with any of the underlying negotiators to the contract
13 with respect to this language?
14 A Yeah, I was going to finish that sentence.
15 I'm certain it was Mr. Ward. I'm not sure whether maybe
16 Mr. Myers or Mr. Nicholson were part of that in my
17 presence or whether I discussed it with Mr. Ward and he
18 indicated he confirmed it with Mr. Nicholson and
19 Mr. Myers. I just don't recall.
20 Q And when you say it's obvious on the face
21 of the document, what language are you referring to
22 within the contract?
23 A I guess I'm referring to the absence of any
24 language. I don't see anything that says we don't
25 anticipate deregulation. We didn't know what
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1 deregulation was in 1991.
2 Q And you state that if the parties had
3 anticipated this situation, they likely would have
4 addressed it in the agreement, probably by a mutual
5 reservation of rights.
6 A Yes.
7 Q And this statement is a result of
8 conversations with who?
9 A It was probably primarily Mr. Ward in
10 conjunction with the fact that changes in resource base
11 that we're talking about here affect the rates of
12 Potlatch independently of the contract.
13 Q And should we read this in the context of
14 the testimony of Potlatch in the underlying contract case
15 where the company through its attorney Mr. Ward is saying
16 what we have here is a wager that we're asking the
17 Commission to accept?
18 A A wager?
19 Q You don't recall that testimony in the
20 transcript? Mr. Ward asks Mr. Nicholson on page 152 of
21 the underlying transcript, "It's a wager, is it not, from
22 the Commission's point of view?"
23 Mr. Nicholson answers, "It is."
24 And Mr. Ward questions, "And if the wager
25 turns out badly, then the Commission having surrendered
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1 its normal ratemaking standard will look badly at the
2 time of the contract; correct?"
3 Mr. Nicholson responds, "That's true."
4 "Conversely, if these forecasted numbers
5 are correct, the ratepayers will benefit?"
6 Mr. Nicholson responds, "Considerably."
7 And then in another response, Mr. Nicholson
8 answers, "There's no way that the Commission can be
9 absolutely 100 percent sure that a circumstance would
10 occur that if you approve this arrangement you might
11 seven or eight years later say, golly, we never thought
12 of that."
13 Isn't this one of those instances that have
14 happened?
15 A Has that instance happened?
16 Q Yeah, the sale of Centralia.
17 A No, I think what that's referring to are
18 circumstances that would by setting the contract rates
19 that they could be too high or too low and in fact,
20 they've proven to be, as I testify in my direct
21 testimony, far too high. I didn't see that as a wager
22 about structural change in the industry. We didn't think
23 in those terms in 1990.
24 Q But in the context of Mr. Nicholson's
25 testimony, wasn't he talking about construction of
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1 thermal generating facilities as being one of the factors
2 that might occur?
3 A Well, sure, there's nothing unique about
4 the construction of thermal facilities, but he would have
5 been concerned because the economics of the thermal
6 facilities that were sited had a direct impact, so if
7 you're suggesting that the contract insulated Potlatch
8 from the construction, the economics of the construction,
9 of thermal facilities, it's not true. We just defined
10 incremental costs and system avoided costs and those are
11 directly related to the resource stack in place at the
12 time.
13 Q Sale of utility generation resources is
14 something that is just outside of your thoughts when
15 negotiating a contract as perhaps having an effect?
16 A Yeah, I certainly wouldn't have thought of
17 it in 1990.
18 Q And did you discuss that with anybody who
19 negotiated the contract?
20 A With regard to the construction of thermal
21 facilities or --
22 Q With respect to the sale of a thermal
23 facility or sale of a generation resource.
24 A I think that's addressed on page 15, 5
25 through 12. Those were the general discussions. We just
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1 didn't see deregulation happening. I don't know that I
2 recall any representative of Potlatch saying that they
3 had or had not anticipated the sale of Centralia.
4 Q And did -- this was conversation that you
5 said you had with Mr. Ward. Do you know whether Mr. Ward
6 participated in the negotiation of that contract?
7 A Yes.
8 Q Yes, you know?
9 A Yes, I believe he did.
10 MR. WOODBURY: Thank you, Dr. Peseau.
11 Madam Chair, I have no further questions.
12 COMMISSIONER SMITH: Thank you,
13 Mr. Woodbury.
14 Mr. Dahlke.
15 MR. DAHLKE: Yes, a few questions.
16
17 CROSS-EXAMINATION
18
19 BY MR. DAHLKE:
20 Q Mr. Peseau, I wanted to ask you about the
21 concept of equitable ownership that you refer to in your
22 testimony.
23 A Yes.
24 Q And I believe that you've referred to it
25 specifically in regard to Potlatch as its equitable
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1 right, that is, that it's specific to Potlatch; is that
2 correct?
3 A Yes, I believe it's specific to Potlatch.
4 Q And what confused me about that, I had a
5 question regarding customers leaving the system or
6 customers coming on to the system, isn't it the case with
7 regard to the distribution of the Centralia gain that
8 customers that leave the Avista system aren't going to
9 receive any allocation of that gain if they leave prior
10 to the time that the distribution is made?
11 A As a practical matter, that's right, people
12 who leave the system. I'm referring to current customers
13 and Potlatch is, of course, a current customer.
14 Q And wouldn't the same be true with respect
15 to new customers that come on to the system at the time
16 that the gain is being distributed, they would receive
17 the gain even though they didn't participate in the
18 payment of any depreciation of Centralia?
19 A Right. That's not a preferred outcome, of
20 course, but it's an administrative practicality.
21 Q So in that sense, then, aren't we treating
22 the equitable ownership concept as a concept that belongs
23 to customers as a group and does not belong to any
24 specific customer individually?
25 A It refers to any current customer in my
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1 mind.
2 Q You were asked about the provisions of
3 section 21 of the contract and the reference to
4 Commission authority there to change the rates or impose
5 new regulations. When you reviewed that, were you
6 considering just actions of the Idaho Commission or were
7 you also considering the potential for actions of the
8 Washington Commission?
9 A Could you refer me? Are you talking about
10 my direct testimony or my rebuttal?
11 Q No. In response to the cross-examination
12 by Mr. Woodbury, you were asked about section 21 and
13 whether that permitted any change in the rates in the
14 contract and I believe that you answered with respect to
15 actions by the Idaho Commission. I just wanted to
16 establish that there's also potential for actions by the
17 Washington Commission, is there not?
18 A With respect to Potlatch rates, this
19 contract?
20 Q Yes.
21 A I suppose there's room for adverse
22 allocations to the company.
23 Q And those would be with respect to the sale
24 of the generation portion and the costs of the sale of
25 generation from Potlatch to Avista?
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1 A I don't understand the question.
2 Q Would the Washington Commission have any
3 jurisdiction to consider the price at which power was
4 sold by Potlatch to Avista for ratemaking purposes?
5 MR. WARD: Madam Chair?
6 COMMISSIONER SMITH: Mr. Ward.
7 MR. WARD: I guess just for the purposes of
8 clarity, I ought to object. My memory of this is kind of
9 dim because it was 15 to 20 years ago, but as I recall,
10 that was a huge issue in the whole proceedings or course
11 of proceedings regarding approval of the Potlatch
12 contracts that were subsequently turned down; that is, it
13 was a bone of contention between not only the parties but
14 also the two state commissions whether the Washington
15 Commission had jurisdiction and if they had any
16 jurisdiction how it applied, so I just want to clarify
17 that this is a pretty complex legal issue for Dr. Peseau
18 to give an off-the-cuff opinion on.
19 COMMISSIONER SMITH: Is that an objection?
20 MR. WARD: It is an objection, I guess.
21 COMMISSIONER SMITH: Mr. Dahlke.
22 MR. DAHLKE: Well, all I'm trying to
23 establish is that the provisions of section 21 are not
24 specific to the Idaho Commission, but also relate to
25 potential actions by the Washington Commission and I
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1 think that -- I don't believe that should be an issue
2 relative to any legal conclusion. What I want to
3 establish with the witness is that it's not just the sale
4 of power for consumption by Avista to Potlatch that's
5 involved here, but also the price for the sale of power
6 from Potlatch to Avista and that that latter transaction
7 has multi-jurisdictional issues associated with it, not
8 just the Idaho Commission.
9 MR. WARD: I would accept Mr. Dahlke's
10 testimony.
11 COMMISSIONER SMITH: Well, good, because I
12 was going to overrule your objection and ask Mr. Dahlke
13 to see if he could put that into questions and see what
14 the witness knows.
15 Q BY MR. DAHLKE: Well, I guess what I'm
16 getting at, Dr. Peseau, is that there are two prices
17 involved in this contract. There's a price for the power
18 sold by Potlatch and a price for power purchased by
19 Potlatch.
20 A Yes.
21 Q And the price for power that is purchased
22 by Potlatch, absent the contract, would have been one
23 exclusively under the jurisdiction of the Idaho
24 Commission; is that correct?
25 A That's my understanding, yes.
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1 Q The price of power sold by Potlatch to
2 Avista would have been one of many components of an
3 overall system cost that Avista Corporation has for all
4 of its power resources; is that correct?
5 A Yes, and my reading of the transcript and
6 the historical development of the eventual contract,
7 there were several sessions back and forth, at least
8 between the Washington Commission and Idaho Commission,
9 with different sets of, first, PURPA based rates and
10 then, secondly, negotiated rates, so the answer is yes.
11 Q And for ratemaking purposes, the two
12 commissions have not historically had location specific
13 resources for ratemaking purposes, but rather have used
14 system resources for purposes of setting rates; is that
15 correct?
16 A Yes. In fact, I think that was some
17 testimony of Mr. Faull who suggested that maybe that
18 wasn't the way to go, but I think the Commission rejected
19 that.
20 Q Do you know also whether Potlatch has in
21 the past historically generated into its own load?
22 A What do you mean "historically"?
23 Q Looking retrospectively, has Potlatch in
24 the past generated into its own load at the Lewiston
25 location?
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1 A I just meant are you talking about prior to
2 1991 or just in general?
3 Q Yes, prior to 1991.
4 A I believe it has.
5 Q And this contract expires in --
6 A 2001.
7 Q -- 2001? After that time period, is there
8 anything that prevents Potlatch from generating into its
9 own load?
10 A Legally?
11 Q Legally.
12 A I don't know.
13 Q And I think you also stated that Potlatch
14 is obligated to be a customer of Avista Corporation, that
15 it doesn't have an option to leave the system; did I
16 understand you correctly?
17 A Yes.
18 Q And are you familiar with the appeal that's
19 currently pending in the Ninth Circuit Court of Appeals
20 involving the Snake River Co-op case?
21 A No.
22 MR. DAHLKE: No further questions.
23 COMMISSIONER SMITH: Do we have questions
24 from the Commission?
25 COMMISSIONER KJELLANDER: I do.
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1 COMMISSIONER SMITH:
2 Commissioner Kjellander.
3
4 EXAMINATION
5
6 BY COMMISSIONER KJELLANDER:
7 Q Good morning, Mr. Peseau.
8 A Good morning.
9 Q I think I just have one question. You
10 mentioned repeatedly that at the time the contract was
11 established that no one anticipated the sale of Centralia
12 or assets like that, but you also mentioned that with
13 restructuring of the electric industry that the sale of
14 generation assets has become more commonplace in the
15 industry and I was wondering if you were aware of any
16 other states, PUCs' orders or any other court decisions
17 that have treated special contract customers in the
18 manner that you're seeking in this case.
19 A I'm not sure if this legally is conclusive,
20 but in Nevada right now the divestiture proceeding of all
21 the generation resources owned by Sierra Pacific and
22 Nevada Power are -- that process is past the first stage
23 of bidding and it looks like the bids are substantial and
24 there will be a substantial gain. The past cost
25 regulations which are still not 100 percent finalized,
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1 but I think I can predict that they'll remain pretty much
2 as they stand now, there have been several iterations,
3 the provisions provide for the distribution of the gain
4 after certain deductions for qualifying facility
5 commitments and so forth, but to the extent there is a
6 gain after that, that's to be shared with ratepayers and
7 to date, there's been no exclusion of special contracts,
8 the large mines, the Nellis Air Force Base and so forth,
9 so I'm not familiar with what happened in California or
10 even whether that generated a gain, but as we work almost
11 daily in Nevada, I think that's going to happen in
12 Nevada, but I suppose a late edit to the present
13 conditions, but so far as I know, all current customers
14 will receive the benefits of the gain.
15 Q So then you haven't had an opportunity to
16 review any of those special contracts that may be part of
17 the case or record to see if there's any explicit
18 language that deals with the treatment of gain in those
19 special contracts?
20 A I haven't, no.
21 COMMISSIONER KJELLANDER: Thank you.
22 COMMISSIONER SMITH: Redirect? Oh,
23 Commissioner Hansen.
24 COMMISSIONER HANSEN: I just had one
25 question just to clarify.
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1 EXAMINATION
2
3 BY COMMISSIONER HANSEN:
4 Q After reviewing your testimony and
5 listening today, am I correct in that you don't feel that
6 the contract should have any influence in Potlatch's
7 participation in the gain; is that correct?
8 A I think that's a fair characterization,
9 Commissioner. I think at least my testimony and I
10 thought what I read on the depreciation reserve
11 methodology establishes customers' rights to gain based
12 on depreciation and I think Mr. Lobb certainly agrees
13 with my conclusion that Potlatch has paid its
14 depreciation, its fair share of depreciation, and I think
15 to me as an economist that does it.
16 Now, I don't see anything in the contract
17 that prohibits it and I read Staff's testimony at least
18 as saying, well, there's nothing that forces you to do
19 it, so let's not do it and I guess I don't fully
20 understand that, but I don't see anything in the contract
21 that controls that. I see this as something distinctly
22 different from rates. It's a matter of a market value
23 exceeding book value. That's called a capital gain and
24 who's entitled to the capital gain, I think people who
25 contributed to the gain and for me, at least from the
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1 financial standpoint, it's that simple.
2 COMMISSIONER HANSEN: Thank you. That's
3 all the questions I have.
4 COMMISSIONER SMITH: Redirect, Mr. Ward?
5 MR. WARD: Yes, if I may approach the
6 witness.
7 (Mr. Ward approached the witness.)
8 MR. WARD: I'm somewhat reluctant to chase
9 this rabbit of what the contract standard means further,
10 but I want to add one element. I think our next exhibit
11 number is 210.
12 COMMISSIONER SMITH: We'll mark this as
13 Exhibit 210.
14 (Potlatch Exhibit No. 210 was marked
15 for identification.)
16
17 REDIRECT EXAMINATION
18
19 BY MR. WARD:
20 Q I want to make this relatively quick,
21 Dr. Peseau. Counsel questioned you extensively over what
22 the contract standard means and what the intention of the
23 parties was when they negotiated the contract. Wouldn't
24 it be fair to say that Potlatch is not disputing the fact
25 that the parties hoped and intended that the designated
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1 rates in that agreement would remain in place without
2 Commission alteration on general rate case principles?
3 A Yes.
4 Q However, the language, does the language
5 preclude the Commission from intervening in that
6 contract?
7 A No, it does not.
8 Q And in fact, what it provides, does it not,
9 is that if the Commission does intervene, the parties can
10 then look to their own interests and determine whether
11 one or both want to terminate the agreement?
12 A Yes, that's my understanding.
13 Q Now, by contrast, if you take -- have you
14 reviewed other contracts that have explicit contract
15 language in the sense Mr. Woodbury is using the term?
16 A Yes, I have.
17 Q And do those contracts typically provide
18 that once the Commission approves the contract, the
19 initial agreement, that it may thereafter either not
20 intervene or intervene only if it satisfies the adverse
21 to the public interest standard?
22 A I think that's what we typically
23 characterize a pure contract standard as being.
24 Q And I've just passed out a document to you
25 which has been labeled as Exhibit 210. Do you recognize
407
CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 that document?
2 A Yes, that's portions of the FMC contract
3 with Idaho Power which our firm had a hand in.
4 Q And without reading the whole thing, would
5 you point to the section that governs the ability of the
6 Commission to intervene for ratemaking purposes?
7 A Yes, those are contained in section 6,
8 Changes to Prices.
9 Q And how does that differ from the Potlatch
10 agreement?
11 A The Potlatch agreement says basically that
12 the door is open for the Commission to make rate changes,
13 but that changes the ability of contract participants to
14 opt out. This is quite different. This says that the
15 Commission will not act upon -- well, it designates the
16 exact areas in which the Commission can change the rates
17 and my assumption is that anything not directly drawn out
18 and specified here are prohibited.
19 Q And doesn't it provide that with the
20 exception of the noted exceptions, the agreement shall
21 not be subject to change and then goes on to talk about
22 the regulatory agency?
23 A That's correct.
24 Q All right, just one other thing.
25 Mr. Woodbury asked you a number of questions about
408
CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 whether the contract has any provision in it reserving
2 the right to participate in the gains from the sale of
3 the utility's property, and I believe you conceded that
4 it does not. I recognize you're probably not all that
5 familiar with Avista's tariffs, but you do have
6 familiarity with tariffs in many states, do you not?
7 A Yes.
8 Q And do tariffs typically contain a
9 provision that reserves the ratepayer's right to
10 participate in gains?
11 A I'm not familiar with any that do.
12 Q Doesn't that suggest that the right
13 originates somewhere else?
14 A It suggests it, although I don't know the
15 answer to that.
16 MR. WARD: Thank you. That's all I have.
17 COMMISSIONER SMITH: Thank you, Mr. Ward.
18 Thank you, Doctor.
19 (The witness left the stand.)
20 COMMISSIONER SMITH: Do you have any
21 further witnesses, Mr. Ward?
22 MR. WARD: No, we do not.
23 COMMISSIONER SMITH: Mr. Dahlke.
24 MR. DAHLKE: Yes, our witness is Mr. Ronald
25 McKenzie.
409
CSB REPORTING PESEAU (Di)
Wilder, Idaho 83676 Potlatch Corporation
1 RONALD L. McKENZIE,
2 produced as a witness at the instance of Avista
3 Corporation, having been first duly sworn, was examined
4 and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. DAHLKE:
9 Q Please state your name.
10 A My name is Ronald L. McKenzie.
11 Q And are you the Ronald L. McKenzie that
12 previously testified in this proceeding?
13 A Yes.
14 Q And have you caused to be prepared and
15 prefiled direct testimony for this rehearing?
16 A Yes, I have.
17 Q And are there exhibits to that testimony?
18 A Yes, I have two exhibits. They've been
19 identified as Exhibit No. 9 and Exhibit No. 10.
20 Q And do you have any corrections or
21 additions to either your prefiled testimony or your
22 exhibits?
23 A No, I do not.
24 Q Are the answers given in the prefiled
25 testimony true to the best of your knowledge?
410
CSB REPORTING McKENZIE (Di)
Wilder, Idaho 83676 Avista Corporation
1 A Yes.
2 MR. DAHLKE: We would request that
3 Mr. McKenzie's prefiled testimony be spread on the record
4 and that his Exhibits 9 and 10 be marked for
5 identification.
6 COMMISSIONER SMITH: Without objection, it
7 is so ordered.
8 (The following prefiled testimony of
9 Mr. Ronald McKenzie is spread upon the record.)
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
411
CSB REPORTING McKENZIE (Di)
Wilder, Idaho 83676 Avista Corporation
1 Q Please state your name, business address
2 and present position with Avista Corporation ("Avista").
3 A My name is Ronald L. McKenzie and my
4 business address is East 1411 Mission Avenue, Spokane,
5 Washington. I am employed by Avista as a Senior Rate
6 Accountant.
7 Q Have you previously provided testimony in
8 these proceedings?
9 A Yes. I have previously provided direct and
10 rebuttal testimony in these proceedings.
11 Q What is the scope of your testimony in this
12 rehearing proceeding?
13 A My testimony in this rehearing proceeding
14 reiterates and explains the Company's position that the
15 Potlatch special contract should not receive any part of
16 the customer share of the gain on the sale of Centralia.
17 Q Did your previous rebuttal testimony
18 contain the Company's position that the Potlatch special
19 contract should not receive any part of the customer
20 share of the gain?
21 A Yes. At page 8 of my rebuttal testimony
22 beginning at line 22 I stated:
23 "Any rate reduction should be spread to customer
classes, excluding the Potlatch special contract, on a
24 uniform percentage basis as proposed by Mr. Lobb at page
12 of his direct testimony, beginning at line 16. The
25 Potlatch special contract is not subject to price
412
McKenzie, Di 1
Avista
1 adjustments, either increases or decreases. The Potlatch
special contract has been exempted from Power Cost
2 Adjustment (PCA) rebates and surcharges, from the Demand
Side Management (DSM) tariff rider and from the recent
3 general rate increase effective August 1, 1999. The
Potlatch special contract should get no share of any
4 price reduction associated with gain on sale of the
Centralia Power Plant."
5
6 Q What did the Commission direct in its Order
7 No. 28297 regarding the Potlatch contract receiving a
8 portion of the customer share of the gain?
9
10 /
11
12 /
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14 /
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21
22
23
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25
413
McKenzie, Di 1a
Avista
1 A At the bottom of page 11 of Order No. 28297
2 the Commission found:
3 "The Potlatch-Lewiston facility is a special
contract customer and its rates are determined within the
4 four corners of its service contract. We find that the
Company in this case presents a persuasive argument for
5 denying Potlatch any share of the customer portion of the
Centralia gain."
6
7 Q Does the Potlatch special contract contain
8 any provision to adjust rates for the Centralia gain?
9 A No. The Potlatch special contract does not
10 contain any provisions to adjust rates. That is why the
11 Potlatch special contract has been exempted from Power
12 Cost Adjustment (PCA) rebates and surcharges, from the
13 Demand Side Management (DSM) tariff rider and from the
14 recent general rate increase effective August 1, 1999, as
15 I testified earlier in my rebuttal testimony.
16 Q Would you please comment on Dr. Peseau's
17 contention that giving a share of the gain to the
18 Potlatch special contract is not a change in rates?
19 A Yes. Dr. Peseau is trying to use semantics
20 to justify Potlatch receiving a portion of the gain under
21 the Potlatch special contract. The fact is that giving
22 the Potlatch special contract a share of the Centralia
23 gain would result in revenues being less than they are
24 specified to be under the contract. It doesn't matter
25 whether or not the gain is given through a reduction in
414
McKenzie, Di 2
Avista
1 rates or a lump-sum refund; it is not appropriate to give
2 Potlatch any portion of the Centralia gain.
3 Q Would you please comment on Dr. Peseau's
4 contention at pages 6 and 7 of his direct testimony that
5 Potlatch has been paying more than its full cost of
6 service and has been paying for its share of depreciation
7 for Centralia as well as other assets?
8
9 /
10
11 /
12
13 /
14
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16
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415
McKenzie, Di 2a
Avista
1 A The contract rates charged to Potlatch
2 have nothing to do with depreciation for Centralia.
3 Dr. Peseau's claims are not true. Potlatch is charged a
4 monthly fixed firm demand service rate and a monthly
5 interruptible service charge. These rates were designed
6 to recover costs, other than energy costs, including
7 transmission costs, distribution costs, and
8 administrative and general costs. The monthly fixed firm
9 demand service rate and the monthly interruptible service
10 charge as well as the rate for power purchases from
11 Potlatch were negotiated rates between Potlatch and the
12 Company. These negotiated rates have nothing to do with
13 the recovery of Centralia depreciation.
14 The energy components of the sales rates are based
15 on short-term market purchase prices, short-term market
16 sales prices or the incremental cost of resources. The
17 contract rates are not based in any way on the recovery
18 of Centralia depreciation. The cost of service study
19 submitted by the Company in Case No. WWP-E-98-11 should
20 have assigned an energy cost equivalent to Potlatch's
21 energy revenues. It was simply an oversight not to have
22 done so. Potlatch pays market-based rates for energy.
23 The market-based energy rates have nothing to do with the
24 recovery of Centralia depreciation.
25 Q What about the fact that prior to 1991,
416
McKenzie, Di 3
Avista
1 Potlatch was paying a tariffed rate?
2 A Had Potlatch continued to be a tariffed
3 customer instead of becoming a special contract customer
4 in 1991, I would agree that Potlatch should be entitled
5 to a share of the Centralia gain just like any other
6 tariffed customer. However, Potlatch accepted special
7 contract rates for both the purchase and sale of power.
8 Potlatch opted for market-based energy
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
417
McKenzie, Di 3a
Avista
1 purchase rates rather than tariffed rates. The special
2 contract provides for no adjustments to revenues or rates
3 outside of the rates contained in the contract. As a
4 special contract customer, Potlatch should receive no
5 portion of the Centralia gain.
6 Q Do you agree with Dr. Peseau's numbers
7 regarding rate increases?
8 A No. At page 6, beginning at line 5,
9 Dr. Peseau claims that while Potlatch was subject to
10 floor and ceiling rates that escalated every year, the
11 rest of Avista's customers saw no increases until the
12 Commission approved a 7.58% general rate increase
13 effective August 1, 1999. Dr. Peseau's statement is
14 incorrect. Schedule 25 rates were subject to the DSM
15 tariff rider increase of about 1.55% effective March 10,
16 1995. Since the beginning of 1991 there have been 3 PCA
17 surcharges and 7 rebates. The general rate increase
18 applicable to Schedule 25 effective August 1, 1999 was
19 9.97%. A second step Schedule 25 rate increase of 2.32%
20 is to be effective August 1, 2000.
21 Q If one were to accept Potlatch's argument
22 that Potlatch has paid for Centralia depreciation, hasn't
23 Potlatch more than recovered those costs through revenues
24 received by Potlatch from comparable sales to Avista?
25 A Yes. The Potlatch special contract covers
418
McKenzie, Di 4
Avista
1 both purchases from Potlatch as well as sales to
2 Potlatch. Potlatch has been paid more for its sales to
3 Avista than Potlatch has paid for its purchases from
4 Avista for comparable amounts of energy. If one were to
5 accept the argument that Potlatch has paid for Centralia
6 depreciation through its purchases from Avista, then one
7 can also make the argument that Potlatch has more than
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
419
McKenzie, Di 4a
Avista
1 fully recovered such costs through revenues received by
2 Potlatch from comparable sales to Avista. Avista's
3 tariffed customers pay for the higher cost of energy
4 related to purchases by Avista from Potlatch. One could
5 then conclude that Avista's tariffed customers are due
6 any gain on Centralia that might be allocated to
7 Potlatch. If the Commission can reduce revenue from the
8 Potlatch contract for a share of the Centralia gain, then
9 the Commission can also reduce the amount paid to
10 Potlatch for power purchases by a like amount.
11 Q What ratemaking treatment did the
12 Commission reflect in its Order No. 28297?
13 A The Commission directed at the top of page
14 12 of Order No. 28297 that the customer portion of the
15 gain be amortized over eight years with a return on the
16 unamortized balance and that current rates to Idaho
17 tariff customers be reduced by a uniform 1.318%.
18 Q Assuming that Potlatch were to share the
19 customer portion of the gain on a uniform percentage
20 basis, what would be the resulting amount of revenue
21 decrease applicable to Potlatch?
22 A Exhibit No. 9 shows the allocation of the
23 revenue decrease associated with the customer share of
24 the gain assuming a uniform percentage decrease including
25 the Potlatch special contract. The amount allocated to
420
McKenzie, Di 5
Avista
1 Potlatch under a uniform percentage basis is $332,195.
2 The calculation is for illustrative purposes only. The
3 Company's position is that no portion of the gain be
4 allocated to Potlatch.
5 Q Has Dr. Peseau calculated what he believes
6 to be Potlatch's share of the Centralia gain?
7 A Yes. Dr. Peseau's Exhibit No. 209 shows a
8 calculation of a
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
421
McKenzie, Di 5a
Avista
1 lump sum Potlatch share of $255,000. However, his figure
2 of $255,000 is based on Dr. Peseau's mistaken premise
3 that the Commission ordered a 5-year amortization period
4 instead of the 8-year amortization period actually
5 ordered by the Commission. Avista sent Potlatch a
6 production request, Request No. 4, asking whether or not
7 an 8-year amortization period would change Exhibit No.
8 209 and to fully explain and provide all calculations and
9 supporting documentation associated with the
10 recalculation of Exhibit No. 209. I have included
11 Potlatch's response to Avista's Request No. 4 as my
12 Exhibit No. 10. Exhibit No. 10 shows a revised lump sum
13 Potlatch share of $408,000, according to Dr. Peseau.
14 Q Do you agree with Dr. Peseau's calculations
15 shown on Exhibit No. 10?
16 A No. Dr. Peseau apparently recalculates an
17 overall percentage reduction of 1.275% by including
18 Potlatch revenues. The 1.275% overall percentage
19 reduction is based on the first-year revenue reduction of
20 an 8-year amortization period that includes a return on
21 the unamortized balance of the gain. He then applies the
22 1.275% to an approximate Potlatch Schedule 28 revenue
23 number of $4 million to arrive at an annual Potlatch
24 amount of $51,000. He then multiplies the annual amount
25 of $51,000 by 8 years to arrive at a lump sum Potlatch
422
McKenzie, Di 6
Avista
1 amount of $408,000.
2 Dr. Peseau's calculations are flawed in that he
3 uses a revenue reduction percentage that has a embedded
4 return component, even though he wants the revenue
5 reduction as an up front, lump sum payment. He is
6 attempting to take the return on the unamortized portion
7 of the gain for all eight years of the amortization
8 period assuming the first-year return occurs during all
9 eight years of the amortization period. The return
10 component
11
12 /
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14 /
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16 /
17
18
19
20
21
22
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24
25
423
McKenzie, Di 6a
Avista
1 declines over time as the deferred gain is amortized.
2 Potlatch should receive no return component, especially
3 not 8 times the first year return component, under the
4 assumption that a lump sum amount is paid.
5 My Exhibit No. 9 shows the appropriate amount
6 allocated to Potlatch under a uniform percentage basis to
7 be $332,195. Again, the calculation is for illustrative
8 purposes only. The Company's position is that no portion
9 of the gain be allocated to Potlatch.
10 Q Would you please summarize your testimony?
11 A Yes. Potlatch should receive no share of
12 the customer portion of the Centralia gain. Potlatch
13 opted for market-based energy purchase rates under a
14 special contract rather than tariffed rates. The
15 market-based energy rates do not recover Centralia
16 depreciation or any fixed costs. The special contract
17 provides for no adjustments to revenues or rates outside
18 of the rates contained in the contract. Dr. Peseau's
19 calculations are flawed. If the Commission were to
20 decide to reduce revenues under the Potlatch special
21 contract, the Commission could and should reduce the
22 amount paid to Potlatch under the special contract for
23 the purchase of energy by a like amount.
24 Q Does that conclude your direct testimony in
25 this proceeding?
A Yes, it does.
424
McKenzie, Di 7
Avista
1 (The following proceedings were had in
2 open hearing.)
3 MR. DAHLKE: Mr. McKenzie is available for
4 cross-examination.
5 COMMISSIONER SMITH: Mr. Ward.
6 MR. WARD: Just a couple of areas,
7 Mr. McKenzie.
8
9 CROSS-EXAMINATION
10
11 BY MR. WARD:
12 Q If you'd turn to page 4, line 21 of your
13 testimony.
14 A I'm there.
15 Q There begins an answer in response to a
16 question of counsel in which you basically suggest that
17 Potlatch has been paid more for its sales to Avista than
18 the amounts involved in this case and that forms a reason
19 for denying Potlatch the right to participate in this
20 capital gain; correct?
21 A No, that's not correct. That's not the
22 point I'm making at this spot in my testimony. I'm
23 saying that if the Commission were to decide to give
24 Potlatch a portion of the gain, they could just as easily
25 decide to reduce the price that Avista pays for power
425
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 purchased from Potlatch and those two amounts could
2 offset.
3 I'm not suggesting that that's a reason
4 that Potlatch isn't it entitled to the gain. I'm saying
5 that Potlatch is not entitled to the gain, but if the
6 Commission were to decide to give Potlatch a piece of the
7 gain, they could take it right back through the purchased
8 rate that Avista pays and those higher costs are
9 recovered from other ratepayers, so then the Potlatch
10 power cost piece could be passed on to other customers.
11 Q Do you recognize that Potlatch had in 1991
12 and has today a federal statutory right to sell
13 cogenerated power to Avista and Avista has a statutory
14 obligation to buy?
15 A I'm aware of that. This contract is a
16 negotiated contract that includes negotiated purchase and
17 sales rates. They aren't tied specifically to any PURPA
18 rate.
19 Q Now, would you answer my question?
20 A I believe I already did.
21 Q Avista has other suppliers in its service
22 territory that sell it goods and services, does it not?
23 A Yes.
24 Q Presumably under contract?
25 A Yes.
426
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 Q Could the Commission on the grounds that
2 it's changed the nature of the relationship between the
3 parties then intervene in those parties' contracts with
4 Avista?
5 A I don't believe so and that's why I'm
6 arguing in my testimony that the contract rates, both
7 purchases and sales rates, shouldn't be adjusted, but
8 what I'm saying is that if the Commission decides to
9 adjust one rate in the contract, they could just as
10 easily decide to adjust an offsetting rate.
11 Q Let's turn to another matter,
12 Mr. McKenzie. If you'd go to page 3, lines 1 through 10,
13 if I understand this correctly here, at this point you're
14 trying to rebut Dr. Peseau's contention that Potlatch
15 paid depreciation on the Centralia plant, correct?
16 A Correct.
17 Q And you do that by referring to the demand
18 and customer charges and the intention of what elements
19 those charges were to recover; correct?
20 A Correct.
21 Q And you say there, and I want to draw your
22 attention particularly to the lines 4 through 6, and it
23 says, "These rates were designed to recover costs, other
24 than energy costs, including transmission costs,
25 distribution costs, and administrative and general
427
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 costs." Do you see that testimony?
2 A Yes.
3 Q And I take it from that that you're arguing
4 that there was no generating cost recovered in those
5 rates and no depreciation.
6 A That's correct. The demand rates did not
7 recover generation costs and were not established on that
8 basis.
9 MR. WARD: May I approach the witness?
10 COMMISSIONER SMITH: Yes.
11 (Mr. Ward approached the witness.)
12 MR. WARD: In the interests of speeding
13 this along while I pass this out, I'll go ahead and ask a
14 question.
15 Q BY MR. WARD: Mr. McKenzie, do you know who
16 Gregory Prekeges is?
17 A Yes.
18 Q Who is he?
19 A Well, he's retired, but he was a company
20 employee that participated in the contract negotiation
21 with Potlatch.
22 Q Did he testify in the 1991 case regarding
23 approval of the contract?
24 A Yes.
25 Q I've passed you out a document which I will
428
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 represent to you is a page from the transcript of that
2 testimony and I want to refer you to lines 21 through 23,
3 if you would read that sentence, please, out loud.
4 A "The Firm Demand Service Rate includes the
5 cost of capacity, transmission, distribution facilities,
6 and administrative and general costs."
7 Q Now, when I your compare that sentence with
8 the sentence I had you read from your testimony, they're
9 almost identical in structure, except there's one big
10 omission. Mr. Prekeges says the demand service rate
11 includes the cost of capacity, transmission, distribution
12 facilities, and administrative and general costs, yours
13 refers to transmission costs, distribution costs, and
14 administrative and general costs and notably eliminates
15 his reference to cost of capacity. How do you account
16 for that, Mr. McKenzie?
17 A You're correct, it does exclude a reference
18 to capacity and the way I account for it is I spoke with
19 Brian Hirschkorn, who is a current employee, that
20 participated in the contract negotiations and he said
21 that the capacity referred to by Mr. Prekeges was a
22 market estimate of capacity. It had nothing to do
23 whatsoever with fixed costs of any of the company's
24 resources and there was no cost of service study
25 prepared. This was strictly a negotiated rate between
429
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 the two companies. The negotiated rate included both
2 purchase and sales rates and Potlatch was concerned with
3 the net of the two.
4 Q Are you telling me there were no cost of
5 service studies prepared in connection with that
6 proceeding and that there was no evidence that these
7 costs were above cost of service?
8 A No, I'm not saying that. I'm saying that
9 the rates that were negotiated were not based on
10 Centralia fixed costs or Centralia generation or
11 Centralia depreciation.
12 Q How can you have a rate that incorporates
13 cost of capacity that does not incorporate depreciation
14 payments on that capacity?
15 A I already explained that the capacity cost
16 was based on a market estimate of capacity and had no
17 relationship or bearing whatsoever to embedded costs of
18 the company.
19 Q Mr. McKenzie, if you assume -- well, first
20 of all, isn't it true that this contract was actually
21 derived in two parts and I assume you've read
22 Mr. Prekeges' testimony?
23 A Yes.
24 Q And in fact, Mr. Prekeges points out, does
25 he not, that as to the then existing load of Potlatch
430
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 that that portion of the contract was based on embedded
2 costs; isn't that true?
3 A I have his testimony. Could you refer me
4 to that section, please?
5 Q Well, I didn't anticipate that you would
6 deny the cost of capacity means what it says, and do you
7 remember whether in fact those rates were set in a
8 two-part analysis; that is, one part on embedded costs
9 and the addition to load to be determined based on in
10 part incremental costs?
11 A I don't, but I have the testimony. If
12 you'd refer me to the testimony, we can go over it.
13 MR. WARD: That's all I have.
14 COMMISSIONER SMITH: Thank you, Mr. Ward.
15 Mr. Woodbury.
16 MR. WOODBURY: Thank you, Madam Chair.
17
18 CROSS-EXAMINATION
19
20 BY MR. WOODBURY:
21 Q Mr. McKenzie, did you participate at all in
22 the Potlatch contract case, the 91-5 case?
23 A No.
24 Q Did you participate in negotiation of that
25 contract?
431
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 A No.
2 Q To your knowledge, are there any collateral
3 or side agreements that were not represented in the
4 underlying case?
5 A To my knowledge, there are none.
6 MR. WOODBURY: Thank you. No further
7 questions.
8 COMMISSIONER SMITH: From the Commission.
9 COMMISSIONER KJELLANDER: No.
10 COMMISSIONER SMITH: Redirect.
11 MR. DAHLKE: I have no redirect.
12 COMMISSIONER SMITH: Thank you very much,
13 Mr. McKenzie.
14 (The witness left the stand.)
15 COMMISSIONER SMITH: Mr. Woodbury.
16 We have finally realized that all of these
17 witnesses have been previously sworn.
18
19
20
21
22
23
24
25
432
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista Corporation
1 RANDY LOBB,
2 produced as a witness at the instance of the Staff,
3 having been previously duly sworn, resumed the stand and
4 was further examined and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. WOODBURY:
9 Q Mr. Lobb, will you please state your name
10 for the record?
11 A My name is Randy Lobb.
12 Q Are you the same Mr. Lobb who previously
13 testified in the underlying case in this matter?
14 A Yes, I am.
15 Q And have you prepared 14 pages of direct
16 testimony on reconsideration for today's hearing?
17 A Yes, I have.
18 Q And have you had the opportunity to review
19 that testimony prior to this hearing?
20 A Yes.
21 Q And if I were to ask you the questions set
22 forth in your testimony, would your answers be the same?
23 A Yes, they would.
24 MR. WOODBURY: Madam Chair, I'd ask that
25 the testimony be spread on the record and I'd present
433
CSB REPORTING LOBB (Di)
Wilder, Idaho 83676 Staff
1 Mr. Lobb for cross-examination.
2 COMMISSIONER SMITH: Is there any objection
3 to spreading the testimony of Mr. Lobb across the record
4 as if read? None noted, then it is so ordered.
5 (The following prefiled testimony of
6 Mr. Randy Lobb is spread upon the record.)
7
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434
CSB REPORTING LOBB (Di)
Wilder, Idaho 83676 Staff
1 Q Please state your name and business address
2 for the record.
3 A My name is Randy Lobb and my business
4 address is 472 West Washington Street, Boise, Idaho.
5 Q By whom are you employed?
6 A I am employed by the Idaho Public Utilities
7 Commission as Engineering Supervisor.
8 Q What is your educational and professional
9 background?
10 A I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in
12 1980 and worked for the Idaho Department of Water
13 Resources from June of 1980 to November of 1987. I
14 received my Idaho license as a registered professional
15 Civil Engineer in 1985 and began work at the Idaho
16 Public Utilities Commission in December of 1987. My
17 duties at the Commission include analysis of utility
18 rate applications, rate design, tariff analysis and
19 customer petitions. I have testified in numerous
20 proceedings before the Commission including cases
21 dealing with rate structure, cost of service, power
22 supply, line extensions and facility acquisitions.
23 Q Are you the same Randy Lobb that previously
24 filed direct testimony in Case AVU-E-99-6?
25 A Yes.
435
AVU-E-99-6 LOBB, R (Rec) 1
06/14/00 STAFF
1 Q What is the purpose of your testimony in
2 this case?
3 A Pursuant to Commission Order No. 28297 in
4 Case No. AVU-E-99-6, the Potlatch-Lewiston facility, a
5 special contract customer of Avista, was denied any
6 share of the customer portion of the gain associated
7 with the sale of the Company's 15% interest in the coal-
8 fired Centralia plant. Potlatch filed a Petition for
9 Reconsideration. The Commission has provided Potlatch
10 with additional opportunity to present its claim of
11 entitlement. The purpose of my testimony is to present
12 Commission Staff's position.
13 Q Would you please summarize your testimony?
14 A. Yes. In its Order approving the sale of
15 Centralia, the Commission found the depreciation reserve
16 methodology to be a reasonable method for distributing
17 the gain associated with the sale. The depreciation
18 reserve methodology adopted by the Commission recognizes
19 that customers acquired an equitable interest in the
20 Centralia coal fire power plant through the payment of
21 depreciation expenses and are therefore entitled to gain
22 from the sale. The equity interest is essentially
23 created because customers have paid more depreciation
24 expense than is actually required to return the
25 Company's investment. This type of overpayment also
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1 occurs with excessive positive salvage value and lower
2 than anticipated removal costs associated with
3 retirement of Company assets. The resulting
4 depreciation reserve imbalance constitutes a change in
5 cost of service and requires periodic change in Company
6 revenue requirement. The Commission used the gain
7 attributable to customers in this case to reduce the
8 revenue requirement of the Company over the next eight
9 years.
10 Potlatch is one of many specific customers of
11 Avista that paid depreciation expenses associated with
12 Centralia but do not pay tariffed retail rates subject
13 to non-contractual cost of service adjustments. The
14 benefit from the gain is available to all customers
15 paying tariffed rates based on Company revenue
16 requirement during the amortization period. Potlatch
17 negotiated and signed a "contract standard" Agreement in
18 1991 that specified the terms and conditions under which
19 Potlatch takes service from the Company. See Potlatch
20 Exhibit No. 204. As a result of the Agreement (or
21 Contract), Potlatch is neither entitled to savings that
22 result from reductions in cost of service nor subject to
23 higher costs resulting from increases in cost of service
24 during the term of its Agreement. That this was the
25 understanding of Potlatch as to how its Contract should
437
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1 be regarded and interpreted by the Commission is
2 reflected in the transcript of proceedings in Case
3 No. WWP-E-91-5, the case in which the Commission approved
4 the Potlatch Agreement.
5 There has been no showing in this case that
6 failure of the Commission to adjust the Contract rates
7 will adversely affect the public interest, which is the
8 "Agricultural Products" standard for Commission
9 intervention in private Company/customer contracts.
10 Potlatch's entire relationship (rights and obligations)
11 with Avista is defined by its Contract. Potlatch on
12 reconsideration claims entitlement to a benefit apart
13 from and outside its Contract. Potlatch has no
14 contractual right to a share of the Centralia gain. The
15 Commission should not intervene to modify or abrogate the
16 terms of the Avista/Potlatch Contract.
17 Q Did you address the issue of Potlatch's
18 entitlement to gain proceeds from the sale of the
19 Centralia coal fired power plant in previously filed
20 testimony?
21 A Yes, but only briefly. My recommendation
22 in previous testimony was that the customer share of the
23 gain from the sale of Centralia be used to reduce the
24 revenue requirement of all customer classes, excluding
25 special contracts, by a uniform percentage.
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1 Q Why did your recommendation specifically
2 exclude special contracts from sharing in the gain?
3 A Although not discussed in original testimony,
4 my recommendation to exclude special contracts was based
5 on Staff's understanding that "contract standard" rates
6 remain at contract levels over the life of the contract,
7 except upon a showing that the public interest would be
8 adversely affected. The Potlatch Contract, the only
9 special contract Avista has in Idaho, contains
10 specifically defined rates. Potlatch contracted for a
11 certainty in its rates, excluding itself from the
12 vagaries in future forecasting and non-contractual
13 changes in cost of service. Any equitable claim
14 Potlatch had to a share of the gain, it contracted away.
15 Q Dr. Peseau presents a sequential analysis
16 that he believes provides a rational argument that justifies
17 sharing the gain from the Centralia sale with Potlatch.
18 Do you agree with his analysis and conclusion?
19 A No. The first question addressed in the
20 analysis was what is the basis for allocating the gain to
21 Avista's Idaho ratepayers. The philosophy/
22 methodology adopted by the Commission for allocating
23 gain between ratepayers and shareholders is that
24 ratepayers acquired an equity interest in the plant
25 based on the payment of Centralia depreciation expense.
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AVU-E-99-6 LOBB, R (Rec) 5
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1 The ratepayer equity was essentially created because
2 ratepayers paid depreciation expense in excess of that
3 needed to recover the Company's Centralia investment.
4 The result was a book value that was significantly below
5 the actual plant residual value at the time of the sale.
6 Consequently, customers "invested" in the plant by
7 virtue of the excessive depreciation expense included in
8 the Company's revenue requirements during the period it
9 owned the plant.
10 This mismatch between net book value and
11 residual value materializes in the form of a
12 depreciation reserve imbalance because asset useful
13 lives, salvage values or removal costs are not
14 accurately estimated. Reserve imbalances represent a
15 change in cost of service that occasionally require a
16 periodic revenue requirement adjustment through
17 amortization.
18 In this regard, the depreciation reserve
19 methodology provides the rationale to quantify general
20 customer entitlement but it does not necessarily specify
21 which ratepayers are entitled to participate.
22 Consequently, in response to the second question posed
23 in Dr. Peseau's analysis, the rationale does not
24 necessarily apply with equal force to Potlatch.
25 Q Aren't all ratepayers that paid Centralia
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1 depreciation expense entitled to a portion of the gain?
2 A Not necessarily. There are three distinct
3 groups of ratepayers/customers that have arguably paid
4 depreciation expenses associated with the Centralia
5 plant. The first is tariffed rate retail customers that
6 have been and continue to be served by Avista. The
7 second is tariffed rate retail customers that have been,
8 but are no longer served by Avista, and the third group
9 is the contract rate retail customer that includes only
10 Potlatch.
11 The Commission has historically treated gains
12 as a reduction in revenue requirement or used them to
13 pay for system improvements for the benefit of the
14 general body of customers. It has never, to my
15 knowledge, tried to assure that specific customers who
16 may have contributed to the existence of a gain, receive
17 their pro rata share of such gain. In this case only
18 the tariffed rate retail customers that are served by
19 Avista during the eight-year amortization period have
20 been allowed by the Commission to share in the gain from
21 the sale of Centralia. Specific customers that do not
22 pay tariffed Avista rates are not subject to the
23 benefit. Should Potlatch become a customer subject to
24 tariffed retail rates during this period, then it too
25 would benefit from the gain through reduced Company
441
AVU-E-99-6 LOBB, R (Rec) 7
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1 revenue requirement.
2 Q Do you agree with Dr. Peseau that the Potlatch
3 contract rates are in excess of cost of service and
4 Potlatch has therefore contributed to Centralia
5 depreciation expenses?
6 A Yes. Evidence presented in Case
7 No. WWP-E-91-5, the Contract approval case, and again in
8 Case No. AVU-E-99-6, the general rate case, indicated
9 that the Potlatch Contract was above cost of service
10 that included a component for Centralia depreciation
11 expense. However, while the Contract was generally
12 perceived to be above cost of service at its inception
13 in 1991 and above cost of service in 1999, it is
14 inconsequential in determining Potlatch's entitlement to
15 a portion of the gain. Potlatch argues equity when its
16 rights are determined by contract. Absent a showing
17 that it adversely affects the public interest, no
18 modification of the Contract should occur.
19 Q Is it clear that the Contract standard is
20 the appropriate standard to follow in considering
21 Potlatch's entitlement to a portion of the gain?
22 A Yes. This Contract specifically established
23 rates that did not change with non-contractual changes
24 in cost of service. It therefore constitutes a contract
25 standard agreement rather than a tariff standard
442
AVU-E-99-6 LOBB, R (Rec) 8
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1 agreement. Moreover, the perception that rates within
2 the Agreement were specifically established using the
3 contract standard seemed to be shared by Staff, Potlatch
4 and the Commission. Potlatch witness Peseau on
5 reconsideration provides evidence that the Commission
6 Staff in Case No. WWP-E-91-5 clearly believed rates
7 within the Agreement were established based on the
8 contract standard rather than the tariff standard.
9 Potlatch stopped short of saying that it agreed with
10 Staff's interpretation. It should be precluded from
11 inferring otherwise.
12 Testimony of Potlatch witness Nicholson in Case
13 No. WWP-E-91-5 states:
14 Commissioner Miller to Nicholson
(participant in Contract
15 negotiations)
16 Q. Do I understand correctly that
the proposal is that the agreement
17 during its term could be reviewed by
the Commission under what's called
18 the contract standard as opposed to
the tariff standard?
19 A. What we have here is a
contract that we believe would be in
20 place for ten years and the
Commission would not be concerned
21 with it in that time frame.
Tr p 144
22
23 The Commission, in its subsequent
24 consideration of an Idaho Power/FMC contract
25 acknowledged in footnote, its prior approval of
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AVU-E-99-6 LOBB, R (Rec) 9
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1 "contract standard" rates for Potlatch. Reference Order
2 No. 27463, page 4, footnote 3, Case No. IPC-E-97-13.
3 The Commission in furtherance of its understanding has
4 also excluded Potlatch from all non-contractual changes
5 in Avista's cost of service over the term of the
6 Contract. Avista witness, McKenzie, in rebuttal
7 testimony previously filed in this case, highlighted the
8 changes that affected tariff rates but not rates in the
9 Potlatch Contract. The changes include the Power Cost
10 Adjustment (PCA), the Demand Side Management (DSM)
11 tariff rider and the increase, effective August 1, 1999,
12 that resulted from the general rate case.
13 Q Potlatch witness Peseau points to paragraph
14 21 of the Contract, COMPLIANCE WITH THE LAWS, as a unique
15 contract provision that specifies neither a contract
16 standard nor a tariff standard. Does this section
17 require or prohibit the Commission from changing the
18 Potlatch rates?
19 A It does neither. It simply puts the
20 Commission on notice that either party can get out of the
21 Contract if the Commission imposes new or changed
22 regulations or policies that affect the rates. The
23 significance of Agreement Paragraph 21 was discussed by
24 Potlatch witness Nicholson in Case No. WWP-E-91-5:
25
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AVU-E-99-6 LOBB, R (Rec) 10
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1 Commissioner Miller to Nicholson
2 Q. As I understand it, the
contemplation is that the rates
3 contained in the contract wouldn't be
subject to Commission adjustment
4 during the term of the contract, and
if they were adjusted, the contract
5 could be terminated; is that right?
A. There is, there was the
6 contemplation that these rates would
stay in place for the life of the
7 contract as they are defined in the
contract
8 Tr page 145
9 Q. The terms of this contract are
such that if its accepted, the
10 Commission accepts a constraint upon
its normal scope of authority; that
11 is, it's accepting a constraint to
the general effect that it will forgo
12 the usual right the Commission has to
adjust contract rates. Can you
13 accept that assumption.
A. I'll accept that assumption.
14 Tr page 146
15 The nature of the Potlatch Contract, vis a vis
16 the Commission and the Company's other ratepayers, was
17 further articulated by Potlatch witness Nicholson in its
18 contract case:
19 A. There's no way that the
Commission can be absolutely 100%
20 sure that a circumstance would occur
that if you approve this arrangement
21 you might seven or eight years later
say, golly, we never thought of it ...
22 Tr. Page 149, Nicholson
23 Potlatch atty. Conley Ward to
Nicholson
24
Q. Mr. Nicholson, it is a wager, is
25 it not from the Commission's point of
view?
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AVU-E-99-6 LOBB, R (Rec) 11
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1 A. It is.
2 Q. And if the wager turns out badly,
then the Commission having
3 surrendered its normal ratemaking
standard will look badly at the end
4 of the contract; correct?
A. That's true.
5
Q. Conversely, if these forecasted
6 numbers are correct, the ratepayers
will benefit.
7 A. Considerably
Tr. Page 152
8
9 Both paragraph 21 and testimony in the
10 Potlatch contract approval case, support the position
11 that alteration of the Contract by the Commission allows
12 either party to terminate the Agreement.
13 Q Dr. Peseau states that returning a portion of
14 the sale gain to Potlatch is not a change in rates. Do
15 you agree?
16 A No. It may not be a change in the unit prices
17 specified in the Contract but if the gain is returned in
18 an annual lump sum as recommended, it certainly
19 constitutes a change in net annual costs and revenues
20 for both parties. The Contract specifies both the price
21 that Potlatch will pay for electrical service and the
22 price that Potlatch will receive for its generation. The
23 Contract therefore specifies the annual cost and the
24 annual revenue that will result. A reduction in the
25 annual cost to Potlatch implies a net reduction in the
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AVU-E-99-6 LOBB, R (Rec) 12
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1 unit price of electrical service, an increase in the
2 unit price of generation sold to Avista or changes in
3 the unit price of both. The change requested by
4 Potlatch on reconsideration could trigger the right of
5 the parties to terminate the Contract.
6 Q Why does the contract standard Agreement
7 generally insulate Potlatch from cost increases and
8 prohibit it from benefiting from cost decreases?
9 A Staff's position regarding the contract
10 standard comes from a 1976 Idaho Supreme Court ruling in
11 Agricultural Products vs. Utah Power and Light Company
12 (98 Idaho 23, 557 P2d 617 (1976)). The Court's decision
13 at page 29 states in part that:
14 Private contracts with utilities are
regarded as entered into subject to
15 reserved authority of the state to
modify the contract in the public
16 interest...
To justify state interference with
17 the utility contract, there must be a
finding that the rate "is so low as
18 to adversely affect the public
interest - as where it might impair
19 the financial ability of the public
utility to continue its service, cast
20 upon other consumers an excessive
burden, or be unduly discriminatory.
21
22 I maintain that no showing has been made to
23 demonstrate that the public interest will be adversely
24 affected by failure of the Commission to intervene in
25 the Contract and return a portion of the Centralia gain
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1 to Potlatch. Therefore, the answer to question three of
2 Dr Peseau's analysis is yes; the Potlatch Contract does
3 waive Potlatch's entitlement to a portion of the gain.
4 Q Does that conclude your reconsideration
5 testimony?
6 A Yes it does.
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: Mr. Ward, do you have
4 questions for Mr. Lobb?
5 MR. WARD: Yes, I have a few.
6
7 CROSS-EXAMINATION
8
9 BY MR. WARD:
10 Q Mr. Lobb, on page 4 and page 6 and again on
11 page 6 of your testimony, you argue that what we have
12 here is a reserve imbalance that is being adjusted and
13 that this constitutes a change to cost of service; do I
14 understand you correctly?
15 A It's essentially the same.
16 Q And I take it, then, that the implication
17 is that Potlatch's rates shouldn't be adjusted and
18 Potlatch shouldn't be allowed to participate in this gain
19 because it's really just a rate adjustment and a cost
20 adjustment.
21 A That's basically the way the Commission has
22 handled it in the past. Different types of return of
23 gain have been through, made to ratepayers through
24 reduction in revenue requirement of the company and that
25 can be done immediately or in a subsequent rate case as a
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1 result of an amortization of a gain.
2 Q Didn't you in your prior testimony in this
3 case argue that it was -- that at this juncture we cannot
4 determine whether there will be any change in the
5 company's costs as a result of this sale?
6 A Do you have my testimony?
7 Q Let me ask you this: As you will recall,
8 the company argued that there would be long-term cost
9 savings with the sale of Centralia; correct?
10 A That's correct.
11 Q And your testimony basically, as I
12 understand it, said maybe and then maybe not. Since it
13 depends on projections, we really can't know; isn't that
14 what you said essentially?
15 A That's true.
16 Q All right; so underlying costs haven't
17 really changed here, have they?
18 A To the extent that depreciation expenses
19 more than covered the return on the capital for
20 Centralia, it's essentially a modification of
21 depreciation expense through the amortization.
22 Q Is that what's really going on here, that
23 we have a restatement of the depreciation reserve?
24 A Not specifically.
25 Q And in fact, if you restated the
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1 depreciation reserve, you'd have to restate income,
2 wouldn't you?
3 A Perhaps. I don't know the answer to that.
4 Q And isn't it true that this is not an
5 income matter at all, that this is a capital gain?
6 A It is a capital gain, but it's a capital
7 gain because of the difference between the residual value
8 of the plant and the book value of the plant and the book
9 value of the plant is established as a result of the
10 accumulated depreciation.
11 Q Okay. Now, previously I passed out copies
12 of the Boise Water decision and a page from what I'll
13 represent to you is Black's Law Dictionary, the edition
14 number I've forgotten, and I asked you to bring those two
15 to the stand with you. Do you have those?
16 A Yes, I do.
17 Q Now, I'd like you to turn to page 1092 of
18 the Boise Water decision and I've marked the passage
19 there. Do you see that?
20 A Yes.
21 Q And in that passage the court is saying,
22 essentially, and I believe witness Stockton testified to
23 this earlier, that in effect, the right to participate in
24 a capital gain arises because the ratepayers purchase a
25 portion of that depreciable property; isn't that correct?
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1 A That's the way it's been stated, yes.
2 Q And on the next page the court refers to
3 this, if you look three, six, seven lines down, refers to
4 the ratepayer situation as equitable owners. Do you see
5 that phrase?
6 A Yes, I do.
7 Q Now, the Black's Law Dictionary excerpt I
8 gave you has a definition of equitable owner and if you
9 would just read that underlined passage.
10 A On page 1092?
11 Q 1259 on the Black's Law Dictionary
12 excerpt.
13 A I'm sorry. It says, "One who is recognized
14 in equity as the owner of property, because the real and
15 beneficial use and title belong to him, although the bare
16 legal title is vested in another, a trustee for his
17 benefit."
18 Q Okay. Now, I'd like you to return to your
19 testimony on page 4. There beginning on line 11 you say,
20 "Potlatch on reconsideration claims entitlement to a
21 benefit apart from and outside its Contract." Do you see
22 that sentence?
23 A On line 9 on page 4?
24 Q I've got 11 on mine.
25 A I'm sorry, what page are you on?
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1 Q I'm on page 4.
2 A Page 4.
3 Q It's line 11 on my text.
4 A And what sentence?
5 Q "Potlatch on reconsideration," do you see
6 that sentence?
7 A Yes.
8 Q Are we okay now?
9 A Yes, I'm with you.
10 Q All right. Now, let me represent to you
11 that Potlatch agrees with that statement. It also agrees
12 with the next statement, "Potlatch has no contractual
13 right to a share of the Centralia gain." Wouldn't it be
14 true that no other party has any contractual right to a
15 share of the Centralia gain?
16 A To the extent that this is depreciation
17 expense, that it's based on depreciation expense paid by
18 the company or paid by the ratepayers and the Commission
19 historically through several, in several cases has chosen
20 to pass that back through rates or improvements in
21 service quality to the general body of ratepayers that
22 are affected by tariff rates, then the fact that those
23 costs or benefits are passed back through the tariffs,
24 then they are entitled to rates based on cost of service.
25 Q Mr. Lobb, does reading what you've just
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1 read of the Supreme Court's decision in Boise Water and
2 the excerpt from Black's Law Dictionary, does the
3 entitlement of ratepayers have anything to do with
4 contractual provisions or, for that matter, tariff
5 provisions or does it arise because the ratepayers have
6 an ownership interest in the plant in question?
7 A The general body of ratepayers have an
8 ownership interest and to the extent that they are under
9 tariffed rates and the Commission has historically done
10 this, they've passed back the benefit of gains through
11 tariffed rates. Now, the basic position is the contract
12 specifies the rates under which Potlatch pays for its
13 energy. This is not one of the -- it doesn't specify any
14 particular or exclude any particular change in the
15 underlying basis of tariffed rates, the underlying cost
16 of service, the underlying rates that the general body of
17 ratepayers are entitled to, so the difference is the
18 specifics of the contract and what Potlatch has chosen to
19 pay under that contract.
20 Q Let me ask it again. First of all, let me
21 respond to your statement about the traditional passing
22 through in rates. Isn't it true that the Commission has
23 used a credit, a billing credit, in the past to
24 distribute these sorts of proceeds?
25 A Sometimes. Sometimes they've just made
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1 investments in the system for the benefit of the general
2 body of ratepayers. Sometimes they've offset taxes that
3 were due and would have been paid for by the general body
4 of ratepayers subject to tariffed rates.
5 Q And in those cases can we even under a
6 stretch definition characterize that as a change in
7 costs?
8 A Certainly, it offsets costs and that
9 changes the underlying costs.
10 Q All right, let me go back to my original
11 question and I still want an answer to it. Does the
12 nature of the customer's right arise from anything having
13 to do with contracts, tariffs or any other consideration
14 beyond the fact that the customers have an ownership
15 interest?
16 MR. DAHLKE: I'll object to the form of the
17 question. The Boise Water, the words that the witness
18 was asked to read were that they were to be treated as if
19 they had an ownership interest. It doesn't say that they
20 have an ownership interest.
21 COMMISSIONER SMITH: Mr. Ward?
22 MR. WARD: And on the following page the
23 court characterizes this as an equitable ownership.
24 COMMISSIONER SMITH: Mr. Ward, I guess we
25 could maybe have a legal discussion about that, but I
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1 think the court has moved on on the second page to the
2 discussion of the interests [inaudible].
3 MR. WARD: That's true, Commissioner, but
4 in entering into that discussion, it contrasts it with
5 those who have an interest in personal property which is
6 who they characterize as equitable owners.
7 THE WITNESS: I would like to respond.
8 COMMISSIONER SMITH: Is this witness one we
9 want to have discuss the Supreme Court decision or is he
10 going to get in trouble practicing law without a
11 license?
12 MR. WARD: I'll withdraw it and let me go
13 another way.
14 Q BY MR. WARD: Mr. Lobb, assume for me that
15 Avista held some property of Potlatch's in trust. Can
16 you make that assumption, let us say a fleet of
17 automobiles?
18 A Okay.
19 Q Do you know what it is to hold something in
20 trust?
21 A Sure.
22 Q And under that trust arrangement, Avista
23 has the title, but Potlatch is the equitable owner of the
24 vehicles. They literally bought and paid for them. Can
25 you hypothesize that?
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1 A Okay.
2 Q Now, the trustee sells the vehicles, could
3 the contract that we are considering in this case be
4 interposed as an objection to the trustee's duty to
5 account to Potlatch?
6 MR. DAHLKE: I apologize, I --
7 COMMISSIONER SMITH: Mr. Dahlke.
8 MR. DAHLKE: -- I don't have any problem
9 with the hypothetical, but we intermix a question
10 concerning the facts of this case and the specific
11 Potlatch contract which doesn't relate to Mr. Ward's
12 hypothetical.
13 COMMISSIONER SMITH: Mr. Ward.
14 MR. WARD: Madam Chair, that's exactly the
15 point. The contract does not relate to ownership
16 interests and that's the point I'm trying to get the
17 witness to answer and I think it's fair to ask him to go
18 this far considering how far into the law he went in his
19 testimony.
20 COMMISSIONER SMITH: Mr. Woodbury.
21 MR. WOODBURY: Madam Chair, Mr. Ward has
22 attempted to take language out of the Supreme Court from
23 the Boise Water case. I think he has taken this out of
24 context, this language that he has underlined, and what
25 puts it into context is the following sentence where the
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1 court indicates how those monies would be distributed and
2 the court says, "The revenue ought to be included in the
3 utility's revenue receipts which reduce the rate charges
4 to customers."
5 In this particular case, the company is
6 saying we're not dealing with rates here. The court says
7 this is a rate matter and I believe that what the
8 Commission has done is consistent with the court's
9 language in the Boise Water case. Potlatch is not a
10 general tariffed customer and so we're not dealing with
11 it here.
12 COMMISSIONER SMITH: It sounds to me like
13 this is fruitful fodder for legal arguments on closing
14 and perhaps not so much as questions for witnesses.
15 Mr. Ward, I will overrule the objection if you want to
16 try to continue.
17 MR. WARD: If I'm on a short leash, I want
18 to go to the better hypothetical.
19 COMMISSIONER SMITH: Okay.
20 MR. WARD: I think we can all answer the
21 first one anyway.
22 Q BY MR. WARD: Mr. Lobb, let me give you
23 this hypothetical: Potlatch is not an equitable owner in
24 the plant. Potlatch instead actually purchased a
25 percentage ownership in Centralia. Can you hypothesize
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1 that?
2 A Yes.
3 Q With real green money, okay?
4 A Okay.
5 Q Again, Avista sells the plant and then what
6 happens to Potlatch's interest? Can Avista refuse to
7 account to Potlatch for that profit on the grounds that
8 it has what you regard as a fixed price contract?
9 A I would say under that hypothetical they
10 would not, they could not; however, I would also point
11 out that the Commission has in the past in light of the
12 ruling made by the Supreme Court that there is an
13 equitable interest, they have not tried to return the
14 gain to every person or every party that has paid it.
15 They have returned it through rates and that is a fairly
16 common occurrence and they have -- and the Staff's
17 position is that is a reasonable way to go, particularly
18 in light of the contract specific revenues and expenses
19 paid by Potlatch.
20 Q Mr. Lobb, wouldn't you agree with me that
21 the correct statement is that sometimes the Commission
22 has returned the gain through rates?
23 A Sometimes they have.
24 Q And don't you recognize the legitimacy of
25 Dr. Peseau's observation about why we don't try to track
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1 down millions of customers that have departed the system
2 to give them their share of the gain, isn't that because
3 it's administratively impossible?
4 A Perhaps that's the reason.
5 MR. WARD: That's all I have. Thank you.
6 COMMISSIONER SMITH: Thank you.
7 Mr. Dahlke?
8 MR. DAHLKE: I have no questions.
9 COMMISSIONER SMITH: From the Commission?
10 COMMISSIONER KJELLANDER: No.
11 COMMISSIONER SMITH: I just have one.
12
13 EXAMINATION
14
15 BY COMMISSIONER SMITH:
16 Q And I've forgotten, Mr. Lobb, whether you
17 participated in Avista's last rate case.
18 A I did.
19 Q So you recall that there was a suggestion
20 that the rate case should be postponed and refiled to
21 take account of the sale of Centralia.
22 A Yes, I do recall that.
23 Q And you recall that the Commission
24 proceeded without doing that?
25 A Yes.
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1 Q Now, my question is when the Commission
2 does take Centralia essentially out of the company's rate
3 base and adjusts, which I assume will happen in the next
4 rate case, will Potlatch's rates change?
5 A It's difficult to say what the next
6 contract is going to be. I believe it's up for -- it
7 will be expired in 2001.
8 Q Well, assume the next rate case happens and
9 is concluded prior to January 1st of 2002, so before the
10 new contract.
11 A No. In fact, they wouldn't, their rates
12 wouldn't change and in fact, in my testimony in the rate
13 case, one of the reasons that I gave for spreading the
14 gain was the fact that customers would be subject to the
15 risk of changes in cost of service in subsequent rate
16 cases as a result of Centralia being eliminated from
17 rates.
18 Q If we had required the refiling of the past
19 rate case to recognize the sale of Centralia, would
20 Potlatch's rates have changed?
21 A No, they would not have.
22 COMMISSIONER SMITH: Redirect,
23 Mr. Woodbury?
24 MR. WARD: Madam Chair, could I follow that
25 up?
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1 COMMISSIONER SMITH: Mr. Ward.
2
3 CROSS-EXAMINATION
4
5 BY MR. WARD:
6 Q Mr. Lobb, on one level I recognize the
7 accuracy of your response to the Commissioner, but I want
8 to make sure that it's not mistaken. Isn't it true that
9 in just the same fashion as other customers are at risk
10 that costs will change and rates will change, the same
11 thing applies to Potlatch under the contract, to the
12 extent that Centralia is removed from the natural
13 resource stack, there is a risk that their prices will
14 change; isn't that true?
15 A To the extent that it's the incremental
16 non-firm price paid by Avista, that is true, but their
17 demand charges do not change with changes in cost of
18 service, only the non-firm energy price and that is a
19 variable cost.
20 Q That's true, but as to their demand
21 charges, weren't those calculated in part on the
22 resources that were going to be available?
23 A In '91?
24 Q Uh-huh.
25 A Yes, but they won't change as a result of
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1 any changes in cost of service.
2 Q Yes, but hasn't Centralia been removed now
3 from those resources?
4 A Sure, and it could be a lot more costly and
5 Potlatch is not going to be subject to those changes.
6 Q One final question, and isn't it also true
7 that to the extent Potlatch is subject to changes in
8 costs as a result of Centralia's removal that those will
9 happen automatically, it doesn't wait for a general rate
10 case?
11 A And that is contractual.
12 MR. WARD: That's all I have.
13 COMMISSIONER SMITH: Redirect,
14 Mr. Woodbury?
15 MR. WOODBURY: Just one question.
16
17 REDIRECT EXAMINATION
18
19 BY MR. WOODBURY:
20 Q Mr. Lobb, do you recall
21 Commissioner Kjellander's questions to Dr. Peseau with
22 respect to whether he was aware of any other state
23 commission dealing with this particular type of matter?
24 A Yes.
25 Q And this Commission also, the Idaho
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1 Commission also, dealt with PacifiCorp's share of
2 Centralia, did it not?
3 A Yes, it did.
4 Q And does PacifiCorp -- is Solutia a special
5 contract customer of PacifiCorp?
6 A Yes.
7 Q And do you know, was there any sharing of
8 gain among customers with respect to PacifiCorp's share
9 of the gain?
10 A No. I believe that was left to a
11 subsequent rate case.
12 MR. WOODBURY: Thank you.
13 COMMISSIONER SMITH: Thank you.
14 MR. WOODBURY: No further questions.
15 COMMISSIONER SMITH: Thank you, Mr. Lobb.
16 (The witness left the stand.)
17 COMMISSIONER SMITH: Are there any other
18 matters that should come before the Commission we close
19 our hearing?
20 MR. WARD: Madam Chair, I'd like to make a
21 brief closing argument.
22 COMMISSIONER SMITH: I think that would be
23 good. Mr. Ward.
24 MR. WARD: Thank you. On at least a couple
25 of occasions, I've been approached in the last few weeks
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1 by knowledgeable participants in the regulatory scene
2 here who have asked me how the Potlatch contretemps came
3 to be, and my response always starts with the fact that,
4 and to a great extent it's my fault, I did not take as
5 seriously as I should have in the original case the
6 objections to Potlatch's participation in the gain and
7 then compounded that by assuming that in cross
8 examination of Mr. McKenzie we could get the matter
9 straightened out.
10 Unfortunately, as you'll recall,
11 Mr. McKenzie was under the mistaken impression that we
12 were dealing with the equivalent of a natural gas bypass
13 contract here and so that led to nothing, but having
14 taken my fair and probably overwhelming share of the
15 blame for the first error, I think it's important to
16 distinguish what happens in persisting in an error and in
17 this case, with all due respect, I submit to the
18 Commission that you have erred.
19 The problem here is that we have become
20 entangled in considerations about what the contract does
21 and does not state with regard to the fixing of rates.
22 We have only tried to point out that there's a subtle
23 distinction between this contract and those that really
24 are fixed rate contracts in which the Commission buys off
25 of that up front, but in sum, that is really all beside
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1 the point.
2 This issue is all about ownership and
3 property rights. Potlatch is literally, along with the
4 other ratepayers literally, an owner of this plant and to
5 say that returning Potlatch's interest to it would be the
6 equivalent of adjusting rates or changing the cost of
7 service is -- I want to find a delicate word. One can, I
8 guess, dance around the subject long enough and construct
9 that argument, but if you ask anybody on the street
10 whether that made any sense whatsoever, they would
11 dismiss it as ludicrous.
12 If I am right and if the court's statement
13 of the nature of the interest that Potlatch and other
14 ratepayers acquired means exactly what it says, that is,
15 that they become owners, equitable owners, of an interest
16 in this property, then I do not see how one can
17 characterize taking that ownership interest without
18 compensation as anything other than confiscation, and the
19 nature of the wrong becomes readily apparent when you
20 look what happens when you take Potlatch's interest.
21 First of all, you deprive Potlatch of its
22 rights, of course, but second of all, then what do you do
23 with it? Who has an entitlement to that interest other
24 than Potlatch? The other ratepayers don't. They didn't
25 pay that depreciation. Water Power doesn't. It doesn't
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1 have an entitlement to something that's already been paid
2 for -- excuse me, I said Water Power, Avista.
3 It's very important that the Commission
4 focus on this and I want to make one more point and I
5 brought the dictionary definition of equitable owner for
6 a particular purpose. The term equitable owner or
7 beneficial owner does not mean as the Staff seemed to
8 assume at least in the earlier proceedings; that is, an
9 ownership interest that is subject to competing claims or
10 has to be sorted out on the basis of the parties'
11 relative bona fides. It doesn't mean that at all.
12 An equitable owner is an owner who is an
13 actual undisputed owner, but mere title is held by
14 another. The definition gives the example of a trustee,
15 but there's many others; securities held in a street
16 name, et cetera, and that's the case here. Potlatch has
17 purchased an interest in this plant. It's identical as
18 if they paid real money for a portion of this plant.
19 Water Power holds the mere title, but neither they,
20 neither Avista or this Commission has the right to
21 confiscate Potlatch's interest without compensation and
22 there is nothing in the contract to the contrary.
23 There's nothing in the contract that cedes any ownership
24 rights, cedes any rights that Potlatch has at law.
25 Finally, I'd like to mention one
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1 parenthetical matter and I bring this up with some
2 trepidation because I don't want to -- I've never
3 suggested in these proceedings whether a party that I
4 represented would or would not appeal, but we have a
5 delicate situation here. If the Commission should
6 wrongfully in my view decide against us on this issue,
7 Potlatch will be faced with a determination of whether it
8 needs to appeal.
9 In that event, I would like some assurances
10 from the Commission that all parties will act in an
11 equitable manner and this is what I'm referring to: If
12 we appeal, in order to prevent the payment of the
13 proceeds, we would have to seek a stay. I do not want to
14 stay the other ratepayers' benefit from this decision.
15 On the other hand, I don't want to go on appeal, come
16 back two years later after winning and be told, well, all
17 right, you won, but part of those proceeds have been
18 disbursed and so, therefore, you're not entitled to that
19 portion that's already been paid and I trust you see my
20 dilemma.
21 All I'm asking for is if the Commission
22 rules against us, give the assurance that as long as
23 there's proceeds -- that the proceeds that would be
24 appropriate for Potlatch to receive will be preserved
25 until the appeal is decided and that no party will argue
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1 that down the road that we have no entitlement to those
2 proceeds that were disbursed. That way, the other
3 ratepayers are whole, we're whole and all parties are
4 preserved in status quo; so I'd like to ask that as a
5 consideration; otherwise, we have no way around the fact
6 that we would have to seek a stay.
7 With that, thank you, Madam Chair.
8 COMMISSIONER SMITH: Thank you, Mr. Ward.
9 It occurs to me I did this backwards, but did
10 Mr. Woodbury or Mr. Dahlke wish to make any closing
11 remarks?
12 MR. WOODBURY: Thank you, Madam Chairman.
13 I really don't have much to say. I think that Staff's
14 testimony in this case said it quite clearly, that
15 Potlatch on reconsideration in our view is claiming
16 entitlement to a benefit apart from and outside its
17 contract. Potlatch contracted for certainty in its
18 rates, excluding itself from some vagaries of the
19 future. That's clearly evident from the underlying case
20 where the contract was presented. I didn't participate
21 in the negotiation or I wasn't a contract party. There
22 are always things that are excluded which parties didn't
23 think about, but any equitable claim Potlatch has had to
24 a share of the gain it's Staff's opinion that it
25 contracted away.
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1 I'm wondering whether we would be here if
2 this sale occurred in year three as opposed to year nine
3 when they only had one year remaining on the contract.
4 COMMISSIONER SMITH: Thank you.
5 Mr. Dahlke.
6 MR. DAHLKE: Yes. We continue to take the
7 position that the prices for Potlatch's service were
8 fixed in the special contract that was entered into with
9 Avista Corporation. It did not detract from what the
10 Commission's jurisdiction would otherwise be, but
11 represented a clear bargain between the parties that as
12 between them those prices where fixed in that agreement.
13 For the remainder of the service, the
14 tariffed customers clearly were in a situation where in
15 the event that any resource on the system was disposed of
16 and there was a gain Boise Water could be applied and
17 those customers would be treated as if they were
18 equitable owners, and perhaps what bears emphasis there
19 is that it's the public in general, the customers in
20 general, and I don't believe this case stands for the
21 proposition that you take the next step and treat
22 individual customers as though they were actual equitable
23 owners whose interests cannot be confiscated as Mr. Ward
24 has characterized it in a regulatory proceeding.
25 We're not proposing to treat customers
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1 generally in that fashion with regard to this gain or
2 other gains, as I understand it, in the past and I think
3 it would be extraordinarily difficult to set the
4 precedent that we would go take that step and treat them
5 in that fashion. If we did take that step, then we fall
6 back to the question of whether that right was waived or
7 wasn't waived in the overall agreement.
8 That's one I hope we don't have to reach
9 because I wouldn't reach it. I don't believe that actual
10 equitable ownership derives from the Boise Water case. I
11 read it to say that a certain group of customers are to
12 be treated for ratemaking purposes as if they were
13 equitable owners and therein lies the difference, so I
14 think the Commission correctly decided this case in the
15 first instance and would urge you not to grant
16 reconsideration.
17 Thank you.
18 COMMISSIONER SMITH: Any further comments,
19 Mr. Ward, since I believe you should have had the
20 opportunity to go last?
21 MR. WARD: Just one observation. I'd like
22 the Commission to conjure with the scenario in which if
23 you accept the other parties' interpretation, can they in
24 fact -- and we have a customer who's contracted for
25 service from a utility based, at least we all agree in
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1 part, on what the perception of costs were at the time,
2 could that utility in fact sell all of its generation
3 capacity, all of its assets, leave the customer holding
4 an empty contract and not pay them a dime in compensation
5 for the loss of their equitable interest? I'll leave you
6 to think about that one.
7 Thank you.
8 COMMISSIONER SMITH: Thank you. The
9 Commission thanks all the parties for participating today
10 and for their help. I don't know what the statutory
11 deadline is on this, but I know it's fairly short, so
12 you'll be hearing from us soon. With that, the record
13 will be closed and the Commission will deliberate as
14 speedily as possible.
15 Thank you.
16 (All exhibits previously marked for
17 identification were admitted into evidence.)
18 (The Hearing adjourned at 11:40 a.m.)
19
20
21
22
23
24
25
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1 AUTHENTICATION
2
3
4 This is to certify that the foregoing
5 proceedings held in the matter of the application of
6 Avista Corporation for authority to sell its interest in
7 the coal-fired Centralia power plant, commencing at
8 9:30 a.m., on Wednesday, June 21, 2000, at the Commission
9 Hearing Room, 472 West Washington, Boise, Idaho, is a
10 true and correct transcript of said proceedings and the
11 original thereof for the file of the Commission.
12 Accuracy of all prefiled testimony as
13 originally submitted to the Reporter and incorporated
14 herein at the direction of the Commission is the sole
15 responsibility of the submitting parties.
16
17
18
19
CONSTANCE S. BUCY
20 Certified Shorthand Reporter #187
21
22
23
24
25
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