Carlock Revised.doc

Q. Please state your name and address for the record.
A. My name is Terri Carlock. My business address is 472 West Washington Street, Boise, Idaho.
Q. By whom are you employed and in what capacity?
A. I am employed by the Idaho Public Utilities Commission as the Accounting Section Supervisor.
Q. Please outline your educational background and experience.
A. I graduated from Boise State University in May 1980, with a B.B.A. Degree in Accounting and in Finance. I have attended various regulatory, accounting, rate of return, economics, finance and ratings programs. I chaired the National Association of Regulatory Utilities Commissioners (NARUC) Staff Subcommittee on Economics and Finance for over 3 years. Under this subcommittee, I also chaired the Ad Hoc Committee on Diversification. Since joining the Commission Staff in May 1980, I have participated in audits, performed financial analysis on various companies and have presented testimony before this Commission on numerous occasions.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to provide the Staff analysis of the accounting costs and financial impacts presented by Astaris. This review included a review of the confidential documents provided and public information.
Q. Astaris has taken the position that the load reduction payment in the Letter Agreement Amendment should not be changed in part because of the costs incurred during 2001. Do you accept this argument?
A. No. I do not accept this position for several reasons including:
These costs were incurred in 2001 and Staff is not proposing to change the load reduction rates for 2001.
Not all of the costs identified are expenditures solely attributed to the Letter Agreement Amendment.
Not all of the costs even if associated with the Letter Agreement Amendment are continuing in 2002 and 2003 when the rate change is proposed.
Have you examined the costs identified by Astaris witness McCarvill?
Yes.
Do you agree with the cost offsets as summarized on page 12 of Ms. McCarvill’s testimony?
No. The schedule below reflects the costs I accept as being Letter Agreement Amendment related. I have used the same categories as Astaris witness McCarvill used on page 12 of her testimony. However, I combined those categories where the category type and the support data were closely linked for my adjustments. Due to the Confidentiality Agreement required by Astaris, I am including only the end results from my audit review in testimony without the detailed supporting numbers. If necessary, the detail will be made available at the hearing.
2001
amounts
Description Millions

Revenue – Letter Agreement Amendment $80.4
payment from Idaho Power
Replacement Raw Materials Cost
and Higher Manufacturing Costs 15.4
Increased Logistics Costs 2.4
Severance Costs 2.6
Closure Costs and Book Write-offs 1.8
Contracts – Related Costs 1.5
Total Costs - Letter Agreement Amendment 23.7
Difference $56.7

Without changing the load reduction rate in the Letter Agreement Amendment, Astaris will be paid $51 million in 2002 and $8 million for January-March 2003. Any offsetting costs would have occurred with the Pocatello plant closure so are not solely or are not related at all to the load reduction in the Letter Agreement Amendment.
Q. You don’t show the take-or-pay amount Astaris pays to Idaho Power for the 50MW as a direct reduction to the revenues from the Letter Agreement Amendment. Please explain.
A. The take-or-pay amount paid is a cost of doing business for Astaris for cost center analysis, financial statements and taxes. However, it is not an incremental cost change caused by the Letter Agreement Amendment. This cost would have been incurred whether or not the Letter Agreement Amendment was entered. For example, the take or pay amount was to recover Idaho Power’s cost-of-service for Astaris. Just as Astaris claims it won’t recover its costs, Idaho Power will not recover its fixed cost of serving Astaris.
Q. How have you determined if the expenditure is related to the Letter Agreement Amendment, a cost that would have been incurred anyway or related to the closure of the Pocatello plant?
A. I looked at many considerations. These considerations included the date the expense was incurred and statements in the documents provided as workpapers by Astaris that may indicate the proper classification. When an expenditure incurred was for a capital cost item or was closure related, I calculated the proper expense for the 2001 year only. This expense may have included depreciation or expenses to mothball a facility but not the full capital cost or closure expenditure amount.
Q. Please explain why you believe closure costs are not directly related to the Letter Agreement Amendment?
A. The decision to close the Pocatello facility according to Astaris witness Seder, was made after the Letter Agreement Amendment. Without the Pocatello closure, the Letter Agreement Amendment by itself should not have required closure of these facilities. Indeed the Letter Agreement allowed Astaris to reconnect furnaces for second block power, which Astaris might have done when rates returned to normal in June 2001. It also allowed Astaris to negotiate a contract for return to full Block 1 power service after March 31, 2003. The business cost analysis for the ongoing cost of operations is a more likely reason for the closures. The closures are consistent with the “continuing strategy of shifting the emphasis of its raw material supply from elemental phosphorus to purified phosphoric acid (PPA).” Staff Exhibit No. 107. Astaris News Release dated 10/11/2001. Also see Staff Exhibit No. 108. This is not a new strategy as evidenced by a statement by Jerry Sibley, Astaris Chief Executive Officer and President, “We announced two years ago the importance of reducing Astaris’ share of feedstock sourced from elemental phosphorus. The PPA process is a much more efficient way of obtaining a phosphorus raw material supply for most products. Continuing cost pressures on elemental phosphorus have reinforced the relative cost advantage of PPA, which has resulted in this decision.” Staff Exhibit No. 107.
Continuing and increasing handling and environmental costs were causing the production cost per pound for phosphorus to increase. Effective Last Quarter of 2001, the Drug Enforcement Administration (DEA) placed phosphorus on the “List 1” for controlled substances. This required the registration with DEA of all manufacturing, importing and distribution of phosphorus. It also required enhanced security measures, enhanced record keeping and reporting 15 days in advance any imports, exports, and certain shipments being made. These enhanced requirements will add to the cost of phosphorus handling, making conversions to purified phosphoric acid economical sooner.
Q. What raw material shortfall have you used for your cost comparisons?
A. I use a raw material shortfall of 52 million pounds in 2001 as identified on page 6, line 6 of Astaris witness McCarvill’s testimony. Budget documents versus actual production documents support this level of shortage to be attributed to the Letter Agreement Amendment.
Q. Please explain your calculation of $15.4 for the combined costs for replacement raw materials cost and higher manufacturing costs.
A. I combined the categories of replacement raw materials cost and higher manufacturing costs because they are directly linked in my evaluation of the incremental costs from the Letter Agreement Amendment in these areas. The additional raw materials costs identified by Astaris witness McCarvill utilize the highest cost suppliers from the sources used in 2001 to calculate this cost. Based on the supply records and invoices, I have used the average cost without the Pocatello operations for my replacement raw materials cost calculation. All but one of the new suppliers added during 2001 had lower costs per pound, including freight, than the cost per pound utilized by Astaris witness McCarvill.
I have added the higher manufacturing costs in with this category since my calculation specifically reflects downstream raw materials cost savings by not using the Pocatello phosphorus. The average projected cost per pound in 2002, without Pocatello, is even lower than the comparable cost per pound in 2001. These decisions are further supported in confidential documents.
Q. Please explain the difference in logistics costs?
A. I have accepted increased logistics costs of $2.4 million rather than the $4 million as reflected on McCarvill Exhibit No. 205. I eliminated logistics costs that were overstated.
The Green River conversion was scheduled to occur later in 2001 anyway. The Letter Agreement Amendment advanced this conversion plan. Therefore, I have removed the $950,000 cost associated with this plant. The Headquarters railcar switching was reduced by $9,000 to reflect the actual cost of $139,000 rather than $148,000. The Carondelet special switching of $110,000 was reduced by $30,000 to the actual cost of special switching incurred during 2001. The isotainer handling charges were reduced to reflect the actual expenses plus depreciation for one year on the capital investment rather than the full capital expenditure amount. Other expenditures ($38,000, $4,000 and $62,000) were not documented with invoices but I did not adjust for these due to the nature of the expenditure and the dollar magnitude. For a utility review these expenditures would be removed from the audited results.
Q. Please explain the difference in severance costs by location.
A. Astaris witness McCarvill quantifies the severance cost at $5 million (table on McCarvill testimony page 12). I have adjusted the itemized costs shown on McCarvill Exhibit No. 204 to reflect actual costs associated with reduced production from the 50 MW load reduction in the Letter Agreement Amendment. I removed those costs more appropriately associated with the Pocatello plant closure. The accepted costs include:
Location No. of Employees Amount (000s)
Pocatello 91 $1,691
Kemmerer 50 897
Dry Valley 9 98
Total 150 $2,686

Q. Astaris witness McCarvill shows on page 12 of her testimony combined costs of $10 million for closure costs and book write-offs. Please explain the difference in the numbers you have accepted.
A. I have accepted the annual depreciation on the Pocatello No. 1 furnace, the Silica Mine and the Kemmerer plant rather than the calculated full write-off costs. I also accepted the actual costs to mothball the Kemmerer plant and the inventory write-off at the Kemmerer plant.
Q. Please explain the difference in contract costs and penalties.
A. I accepted costs of $1.5 million for the contract related costs to cancel the Silica delivery hauling contract during 2001 and the potential coal contract penalty for 2001. The 2001 coal penalty was based on the contract only but may not have actually been incurred or paid. No invoices or cancelled checks were provided. For a utility review, this penalty would not have been used in the audit analysis. Since there have been discussions to renegotiate this contract or the coal could be resold, I did not include the coal penalties for 2002 – 2016, as did Astaris witness McCarvill. If an ongoing penalty is actually incurred it is more appropriately classified as a Pocatello closure cost.
Q. Astaris witness Binz claims on page 21 of his testimony that the rate should not be changed because savings of 1.7%, or 88(, for a residential customer using 1000 kWh of electricity is modest. Is this a reasonable argument alone not to change the rate?
A. No. Staff witness Hessing shows the impact on all customer classes. This impact is not modest or minimal as claimed by Astaris witness Binz. The impact on customers, or the ultimate customer paying the bill, should more appropriately be compared to the impact on Astaris’ owners, FMC and Solutia. The Staff proposed reduction compared to 2000 sales is approximately 0.71% for Solutia and 0.58% for FMC.
Q. What impact did the Pocatello closure have on Astaris’ owners, FMC and Solutia?
A. The Pocatello closure required disclosure in the Form 8-K of FMC but this closure did not have a greater impact on FMC than the closures in 1998 through 2000. The impact of the Pocatello discontinued operations to FMC in 2001 was a $68 million charge (FMC 12/12/01 Form 8-K). Discontinued operations resulted in charges of $70 million in 1998, $59.4 million in 1999 and $81.7 million in 2000. These charges for discontinued operations are similar in magnitude over the years.
Q. What is your conclusion on the weight any costs due to the Letter Agreement Amendment and the impact on Astaris of Staff’s proposed rate change should have in deciding this case?
A. The expenses associated only with the Letter Agreement Amendment are significantly smaller than portrayed by Astaris witness McCarvill leaving a positive impact of $56.7 million in 2001 compared to the $80.4 million payments received. Staff is not proposing to change the rate received during 2001. The payments absent any changes will be $51 million in 2002 and $8 million for the first three months of 2003.
The financial impact on Astaris and its shareholders does not outweigh the impact on ratepayers during the remaining term of the Letter Agreement Amendment.
Q. Does this conclude your rebuttal testimony in this proceeding?
A. Yes, it does.

IPC-E-01-43 CARLOCK, T (Reb) 1
Revised 2/20/02 Staff

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