Hessing Direct.doc

Q. Please state your name and business address for the record.
A. My name is Keith D. Hessing and 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 a Public Utilities Engineer.
Q. What is your educational and experience background?
A. I am a Registered Professional Engineer in the State of Idaho. I received a Bachelor of Science Degree in Civil Engineering from the University of Idaho in 1974. Since then, I have worked six years with the Idaho Department of Water Resources, and two years with MorrisonKnudsen. I have been continuously employed at the Commission since August 1983.
As a member of the Commission Staff, my primary areas of responsibility have been electric utility power supply, revenue allocation and rate design. I have worked with Idaho Power’s Power Cost Adjustment mechanism since 1992 when the formative case was filed.
Q. What is the purpose of your testimony in this proceeding?
A. My testimony discusses the “Letter Agreement” amendment to the Astaris Electric Service Agreement that provides for a 50 MW Idaho Power energy buy back that was approved by the Commission in Case No. IPC-E-01-9, Order No. 28695 dated April 10, 2001. I review market prices in the Letter Agreement and conclude that the rates caused by these prices are unfair and unreasonable going forward. On a prospective basis, I recommend that the Commission adjust the contract prices so that they are fair and reasonable.
BACKGROUND
Q. Please describe the Electric Service Agreement (ESA) entered into between Idaho Power and Astaris’s predecessor, FMC Corporation.
A. In December 1997, the parties filed a joint application requesting that the Commission approve a new special contract to replace the then existing 1973 contract. Briefly, the 1973 contract was an agreement to supply Astaris with interruptible capacity and energy. The current ESA divides Astaris’s supply into two blocks of power. The first block, 120 megawatts, is a firm “take or pay” block. Therefore, Astaris is obligated to pay for the first block of power whether it “takes” the power or not. According to Order No. 27463, this provision produces approximately $22.8 million in annual base revenues to Idaho Power. (Order No. 27463 at 12) The second block of power is provided to Astaris upon its request and at market rates. Sections 13 and 18 of the ESA recognize that the contract is subject to Idaho law but the parties contemplated that the Commission would not have jurisdiction to change the rates once approved.
Q. Did the Commission approve the contract?
A. Yes, the Commission did approve the contract with conditions. Order No. 27463 specifically noted that the Commission has “continuing jurisdiction to review existing contracts and, on its own motion, to investigate rates or practices and to order them changed. Idaho Code § 61-503.” Order No. 27463 at 14. The Commission’s fifth ordering paragraph specifically states that “as a condition of this contract, the Commission retains authority over the contract to insure that, as it is implemented, it does not impair the financial ability of Idaho Power to continue its service nor harm other rate payers.” Id. at 15. Neither party objected to the Commission’s continued jurisdiction by seeking reconsideration or by voiding the entire ESA under Section 14 of the contract.
Q. Would you briefly describe the buy back amendment to the Astaris ESA?
A. On March 16, 2001, Idaho Power Company filed an Application requesting Commission approval of a Letter Agreement amending the ESA between Idaho Power and Astaris LLC. The amendment requires Astaris to sell back, not use, 50 MW of power for all hours of all months beginning April 1, 2001 and ending March 31, 2003. In return, Idaho Power agrees to pay Astaris 86.5% of the monthly forward market prices determined at that time. The 50 MW buy back block was to come from the 120 MW first block of take-or-pay power provided for in the ESA.
Q. What were the circumstances that led to the creation of the buy back agreement?
A. There were three primary factors. First, the Pacific Northwest and Idaho were experiencing an extreme drought that began in the fall and continued in the winter of 2000-2001. The extremely low water conditions in CY 2001, led the Commission to prohibit Idaho’s hydropower utilities (i.e., Idaho Power Company) from drafting water at its hydroelectric facilities to serve non-native firm loads. Order No. 28605 at 4.
Even the Federal Energy Regulatory Commission (FERC) recognized that Idaho Power and other western utilities faced severe water shortages that would result in a significant reduction in hydropower generation. In an Order issued in May 2001, FERC observed that snowpack levels as of April 1, 2001 were less than 50 percent of average in many areas of the Columbia and Snake River Basins including southern, central, and northern Idaho. Seasonal precipitation in March was very low in most of the West and less than 70 percent of average in southern Idaho. The scarcity of snowpack meant that forecasted streamflows for this year in the Northwest would be among the lowest since modern records began in 1929. Order Authorizing Temporary Increase in Generation in Light of Electricity Exigencies in Western United States, Project No. 18-063, at 8, 95 FERC ¶ 61,181 (May 8, 2001).
Q. What effect did the drought have on Idaho Power?
A. As the Commission knows, Idaho Power is especially reliant on hydropower to meet its customers’ demands, and this source of generation is totally dependent on precipitation and water storage. Id. Indeed, as the Commission noted in its 2001 PCA Order, Idaho Power normally generates approximately 60 percent of its total system requirements from its hydropower facilities. Order No. 28665 at 4. The extreme drought condition resulted in Idaho Power generating less hydropower than it normally anticipates. Consequently, Idaho Power had to replace the loss of hydrogeneration with purchases from the Western wholesale market or find other alternatives (such as conservation).
Q. What was the second factor?
A. Not only was Idaho Power unable to generate its normally planned energy, but prices for wholesale energy in the West had been extremely volatile since the summer of 2000. The Commission noted in its PCA Order that average wholesale power prices increased more than ten times from prices one year earlier. Order No. 28665 at 4-5. Wholesale market prices in the West had been at unprecedented levels for almost a year. Monthly prices were consistently higher than $100 per megawatt hour with some peak months averaging $300-$400 per megawatt hour. The extremely low water required Idaho Power to increase its purchases from the wholesale electric market at a time when wholesale prices were at levels much higher than ever before experienced. Idaho Power’s revenue request for the 2000-2001 PCA year was an unprecedented $227 million compared to the next highest increase of $17.3 million.
Q. What was the third factor that led to the buy back agreement?
A. Astaris wanted to change its phosphorous production operation from an electrical process to a purified wet acid chemical process that required considerably less electricity.
Q. What actions did Idaho Power take to reduce or avoid purchases from the regional power market?
A. Idaho Power instituted a number of conservation programs intended to encourage customers to reduce their loads. By reducing customers’ demand for energy, Idaho Power would reduce the amount of power it needed to purchase from the regional market. Buying load back from Astaris at an aggregate rate of $159 per megawatt hour was one of these programs. At the time the Commission approved the contract, forward market prices for the contract term averaged $184 per megawatt hour. In other words, buying the load back from Astaris at less than expected full market price was one of the less expensive options at the time.
Q. What are the terms of the Letter Agreement that amended the ESA?
A. In the Letter Agreement, Astaris and Idaho Power agreed to make 50 megawatts available to Idaho Power for 24 months beginning April 1, 2001 and ending March 31, 2003. Idaho Power agreed to pay Astaris for not using the 50 megawatts based upon projected market prices (fixed at that time) over the term of the letter agreement, minus a 13.5 percent discount. The total buy back amount for the 50 megawatts of power is approximately $139.4 million over the two years, or about $159 per megawatt hour. Paragraph No. 8 of the Letter Agreement states that all the unchanged terms of the ESA remain in force.
Q. When does the ESA and Letter Agreement terminate?
A. Pursuant to paragraph 1 of the Letter Agreement, the ESA and the Letter Agreement amendment both terminate on March 31, 2003.
Q. Did the Staff support Commission approval of the Letter Agreement?
A. Yes. Staff noted that the prices paid for the Astaris load reduction were lower than projected forward market prices during the contract term. Consequently, Staff recommended that the agreement be approved.
Q. Did the Commission approve the Letter Agreement?
A. Yes. The Commission approved the Letter Agreement amending the ESA in Order No. 28695. The Commission found that the buy back allowed Astaris to accelerate the conversion of its manufacturing process and that Idaho Power obtained 50 megawatts “at a discount from projected market rates.” Id. at 5.
EFFECTS OF THE LETTER AGREEMENT
Q. After Commission approval of the Letter Agreement in April of 2001 what happened to actual market prices?
A. Market prices continued in the $200 to $300 per MWh range, near the levels anticipated under the agreement, during the months of April and May of 2001. During the month of June 2001, market prices plunged dramatically to under $50/MWh and remain (now six months later) close to historical levels of $20 to $30 per MWh.
Q. Who pays the direct costs of the Astaris buy back program?
A. Initially Idaho Power pays Astaris the contract amounts associated with the program. Commission Order No. 28695 authorizes Idaho Power to include Idaho’s share of the costs in the Power Cost Adjustment (PCA) mechanism. Within the PCA mechanism 10% of the costs are absorbed by Idaho Power shareholders and 90% of the costs are deferred with interest and passed on to ratepayers through regular rate adjustments. The Idaho Public Utilities Commission allocates 15% of the buy back costs to other jurisdictions that do not currently have a PCA. These costs may be absorbed by Idaho Power shareholders as well.
Q. What is the cost to Idaho ratepayers of the Astaris buy back program?
A. Staff Exhibit No. 101 calculates that total contract buy back costs are expected to be approximately $139.4 million over the life of the contract. (Line 25, Col. G) After 15% of the costs are allocated to other jurisdictions and 10% of the remaining costs are shared with Idaho Power shareholders, approximately $106.6 million remains to be paid by Idaho ratepayers. (Line 25, Col. H) These costs are deferred monthly and will be collected in PCA rates in the two subsequent PCA years of 2002-2003 and 2003-2004. In the PCA mechanism, interest accumulates on the monthly balances. For ease of comparison and because interest rates vary from year to year, I have not included interest in the amounts contained in this testimony. However, adding interest would increase estimated savings under the Staff’s proposal that is presented later in this testimony.
Q. When will the costs of the Astaris buy back program be recovered from customers?
A. No Astaris buy back costs are included in current rates. The program started in April of 2001 and is to end at the end of March 2003. In the normal course of events, the PCA rate adjustment in the spring of 2002 will recover $74.5 million that is deferred from April 2001 through March 2002. This is the Idaho ratepayer’s share of $97.4 million that Idaho Power will have paid Astaris. The PCA rate adjustment in the spring of 2003 will recover the remaining $32.1 million that will be deferred from April 2002 through March of 2003. This is the Idaho ratepayer’s share of $42.0 million that Idaho Power will pay Astaris.
Q. Are current forward market prices for the remaining contract months dramatically less than those included in the original buy back contract?
A. Yes they are. As shown in Staff Exhibit No. 102, forward market prices as of December 17, 2001 are significantly lower than the contract prices in the Letter Agreement. The contract prices are 200 percent to 700 percent greater than current forward prices.
Q. Where did you obtain the December 17, 2001 forward monthly flat market prices for the remainder of the buy back contract term?
A. Idaho Power provided them at my request.
Q. Did you tell Idaho Power what you intended to use the prices for?
A. No.
Q. Did you obtain similar prices from any other source?
A. Yes. I obtained similar prices from Avista for December 20, 2001. See Staff Exhibit No. 106.
Q. How do the Idaho Power and Avista prices compare?
A. The Avista prices are generally lower for the remainder of the buy back contract term.
Q. Which set of forward market prices have you used for your analysis of the January 2002 through March 2003 time period discussed in your testimony?
A. All of my analysis that uses modified or adjusted forward prices is based on the Idaho Power provided prices.
Q. What is the effect on Astaris buy back costs if current Idaho Power forward market prices are used instead of the original contract prices?
A. For the 15 remaining months of the buy back contract, January 2002 forward, Idaho Power ratepayers will pay $34.8 million more for 50 MW of energy. In addition, Astaris will receive a windfall at the expense of other ratepayers.
RECOMMENDATION
Q. Are the costs of the Astaris buy back contract fair, just and reasonable going forward?
A. They are no longer fair, just or reasonable to Idaho Power ratepayers. If the contract prices continue, ratepayers will be adversely affected as the above market costs of purchasing the 50 MW are passed on to them. The Company will also be adversely affected because it shares at least 10 percent and possibly 25 percent of the exorbitant costs. Finally, Astaris will receive a multimillion-dollar windfall even though it has announced that it will cease production at its Pocatello facility in December 2001. (See Staff Exhibit No. 104)
Q. What can and should be done to correct this inequity?
A. As previously mentioned the approval of the ESA was conditioned upon the Commission’s continuing jurisdiction to insure that the ESA “does not impair the financial ability of Idaho Power to continue its service nor harm other ratepayers.” Order No. 27463 at 15. I also understand that the Commission retains jurisdiction over Commission-approved contract rates that are established between utilities and their Idaho jurisdictional customers. Based on these two standards, I believe that it is appropriate for the Commission to review and find that the buy back prices are no longer in the public interest, are preferential, and place an excessive burden on Idaho Power and other ratepayers. If the Commission finds that rates resulting from buy back prices are so high that they are preferential and adversely affect other ratepayers, I recommend the Commission consider an alternative.
Q. What alternative do you recommend?
A. I recommend that the Commission establish reasonable monthly contract prices at the current forward market price for the remainder of the contract beginning January 1, 2002. The prices should not be discounted as they were in the original agreement. This proposal compensates Astaris for the power it does not use at fair market prices and passes fair and reasonable costs on to ratepayers through the PCA mechanism.
Q. With the modification to the contract rates that you propose, how much of the $139.4 million of expected payments contained in the unmodified contract would Astaris receive?
A. Through December 2001, Astaris is expected to receive $80.4 million in payments under the unmodified contract. (Exhibit No. 101, Line 26, Col. G) Payments of an additional $13.5 million are expected to accrue under the modified contract prices during the remainder of the contract term. (Staff Exhibit No. 103, Line 29, Col. E) Therefore, total payments to Astaris are expected to be $93.9 million. Under this proposal, Astaris would not receive $45.5 million that it is otherwise eligible to receive under the terms of the Letter Agreement.
Q. Has Idaho Power already paid Astaris substantial amounts for buy back power priced above market?
A. Yes it has. As previously stated in this testimony, actual market prices have been well below Letter Agreement market prices since June of 2001. Astaris has already received payments of many millions of dollars for buy back power priced well above market.
Q. Do you propose that these payments through December 2001 be voided or that Idaho Power be prohibited from recovering the ratepayer share of these costs?
A. No. I propose that the remaining payments, January 2002 through March 2003, are unreasonable and should be adjusted on a prospective basis.
Q. What are the costs to Idaho Power and its ratepayers of continuing the ESA and not amending the prices in the Letter Agreement?
A. Staff Exhibit No. 101 calculates that total contract buy back costs are expected to be approximately $139.4 million through the end of the letter agreement on March 31, 2003. (Line 25, Col. G) From January 1, 2002 to March 31, 2003, the remaining buy back cost is approximately $59.0 million. After 15 percent of the costs are allocated to other jurisdictions and 10 percent of the remaining costs are shared with Idaho Power shareholders, approximately $106.6 million remains to be paid by Idaho ratepayers. This breaks down to $61.5 million from April 1, 2001 to December 31,2001 and $45.2 million from January 1, 2002 to March 31, 2003. (Staff Exhibit No. 101, Lines 26 and 28, Col. H)
Q. Will forward market prices contained in the existing Astaris buy back Letter Agreement cause customer rates to be substantially higher than the modified Letter Agreement prices that you propose?
A. Yes they will.
Q. What would the savings to Idaho ratepayers be under your proposal?
A. Staff Exhibit No. 104 shows the calculation of the savings in PCA rates. In the coming 2002/2003 PCA year the savings associated with modifying Letter Agreement market prices on a prospective basis will be approximately $11.2 million. (Line 26, Col. F) The same price modifications produce a $23.6 million savings for ratepayers in the 2003/2004 PCA year. (Line 27, Col. F) Total PCA savings to Idaho ratepayers are expected to be $34.8 million in the two years.
The effect of modifying the contract to reflect fair market price on individual customer class rates is shown on Staff Exhibit No. 105, pages 1 and 2. Page 1 shows the savings during the 2002/2003 PCA year and Page 2 shows the savings during the 2003/2004 PCA year. On both pages of the Exhibit the “Revenue Adjustments” column shows revenue savings that result from capturing the reduction in market prices. The “Percent Change” column identifies the percent increase that does not occur.
Q. What effect would the proposed reduced buy back prices have on residential customers?
A. Residential customers would save $2.6 million in the 2002/2003 PCA year and $7.5 million in the 2003/2004 PCA year. Total savings to the residential class is approximately $10.1 million.
Q. How much would irrigation customers save under your proposal?
A. Irrigation customers would save $1.5 million in the 2002/2003 PCA year and $3.1 million in the 2003/2004 PCA year. Total savings to irrigators is $4.6 million.
Q. Would Special Contract customers benefit under your proposal?
A. Yes. These large customers receive the largest benefit. The four Special Contract customers would save $1.8 million in the 2002/2003 PCA year. The savings for the 2003/2004 PCA year would be $3.8 million or approximately 7.7 percent.
Q. Should the benefits of your proposal be reallocated so that all customer groups receive the same percent of the benefit?
A. No. The adjustment of forward market prices in the Astaris buy back contract creates a benefit to other ratepayers as it flows through the PCA. For PCA purposes, the Commission has determined that power supply costs and benefits accrue on an equal ¢/kWh basis. The cost savings that I have shown on Staff Exhibit No. 105 have been distributed to customer classes on an equal ¢/kWh basis which is consistent with the treatment of all other PCA costs or cost savings.
ESCROW
Q. What should be done with Idaho Power’s Astaris buy back payments for months beginning January 2002?
A. The difference between the original Letter Agreement payments and the Astaris payments using my proposed adjustments should be held by Idaho Power in an escrow type reserve account with interest at the customer deposit rate until the Commission issues a final order in this case. At that time the amount held in the account should be given to the appropriate party in accordance with the final decision.
Idaho Power should be required to show on the Astaris bills the difference in monthly payment being held. The current bill reflects the calculation of the buy back amount less any penalties. Beginning January 2002, the bills should also show the revised monthly payment, the monthly amount added to the reserve and the accumulated balance with interest in reserve. A confidential copy of each bill should be filed with the Commission for oversight of the reserve account.
Q. Why do you make this recommendation?
A. There are three reasons. First, The Commission specifically retained jurisdiction over the ESA and its amending letter to insure that Idaho Power and its ratepayers are not harmed. (Order No. 27463 at 15) As set out above ratepayers are harmed by unreasonable and unfair existing buy back costs.
Second, time is of the essence and the Staff is requesting expedited review.
Third, it is my understanding that Astaris is closing its phosphate processing facility in Idaho Power’s service area and it is unclear how any overpayments that may occur during the processing of this case could be recovered. Placing the difference in a reserve account provides the proper assurance that the money will be available for disbursement to the appropriate party.
RECENT BUSINESS DEVELOPMENTS AT ASTARIS
Q. Have there been other business developments since the parties submitted the letter agreement to the Commission amending the ESA?
A. Yes. In October of 2001, Astaris announced that it will cease production of elemental phosphorous at its Pocatello facility by the end of December 2001. This information was contained in an Astaris announcement on its Internet home page. See Staff Exhibit No. 107. FMC Corporation announced the same closure on its web site dated October 11, 2001. The announcement notes that FMC will begin to restore and remediate the site. The announcement states that FMC expects a fourth quarter restructuring charge in the range of $40 to $60 million after taxes. See Staff Exhibit No. 108.
Q. In terms of the Idaho Power system, what does closure of the Astaris plant mean?
A. Except for energy used at the Pocatello facility for remediation and other station functions, Astaris’s four furnaces cease operation. In effect, Idaho Power’s largest single customer utilizing approximately 14 percent of Idaho Power’s jurisdictional energy (derived from Exhibit No. 36, Case No. IPC-E-94-5) will cease to exist. Consequently, the letter agreement obligates Idaho Power to buy back power that Astaris could no longer use since the Company has ceased production operations.
Q. Please summarize your testimony.
A. I have reviewed the Astaris ESA and the amending Letter Agreement and determined that, for the remainder of the contract, the forward market prices contained in the Letter Agreement are no longer fair, just and reasonable. Current forward market prices are significantly lower than those contained in the Letter Agreement. Based on current forward market prices, Astaris is receiving a windfall that, in large part, places an excessive burden on Idaho Power ratepayers. I believe this to be unfair and not in the public interest. I recommend that forward market prices for the remainder of the contract term be adjusted to the current levels proposed in this testimony. By using modified forward market prices Astaris receives fair market value for the energy it sells back to Idaho Power and reasonable power supply costs are passed on to ratepayers through the PCA mechanism. The savings to ratepayers over the remaining contract term is approximately $34.8 million.
This recommendation reduces the Astaris payments by $45.5 million over the remaining contract term. The reduction to Astaris represents a savings to others as follows. Savings to other jurisdictions are $6.8 million, savings to Idaho Power in the Idaho jurisdiction are $3.9 million and savings to customers in the Idaho jurisdiction are $34.8 million. As previously mentioned, savings in other jurisdictions may flow to Idaho Power if Idaho Power has no approved mechanism for passing on abnormal power supply costs.
I also recommend that during the processing of this case, differences in payments to Astaris caused by the proposed change in market prices be held in an interest bearing escrow like reserve account. Finally, it appears that Astaris will no longer produce elemental phosphorus at its Pocatello facility after December 31, 2001.
Q. Does this conclude your direct testimony in this proceeding?
A. Yes, it does.

IPC-E-01-43 HESSING, K (Di) 1
12/28/01 Staff

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