Hessing Rebuttal.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. Are you the same Keith Hessing that previously submitted testimony in this proceeding?
A. Yes, I am.
Q. What is the purpose of your rebuttal testimony?
A. I am responding to several portions of Astaris witnesses Binz’s and Seder’s testimonies.
DISTINGUISHING THE ESA FROM OTHER TYPES OF CONTRACTS
Q. In Mr. Binz’s testimony he refers to the Letter Agreement amending the Astaris Electric Service Agreement as a “third-party vendor” contract. Is the Letter Agreement a “third-party vendor” contract?
A. No. It is part of Idaho Power’s Special Contract entitled “Electric Service Agreement” (ESA) with Astaris. I say this because Astaris and Idaho Power’s joint Application regarding the Letter Agreement states that the Letter Agreement revises the ESA (Staff Exhibit No. 111 at 1). In addition the Letter Agreement itself states that it amends the ESA (Staff Exhibit No. 111).
Q. Why is it important to distinguish between a vendor contract and a “special” contract with a customer for the supply of utility services?
A. The two types of contracts are subject to different regulatory oversight. A special contract is between a regulated utility and one of its customers for the supply of utility services. It is subject to approval by the Idaho Public Utilities Commission and the Commission retains oversight during its full term to assure the contract serves the public interest. On the other hand, “vendor” contracts supplying goods and services to the utility are not approved by the Commission and, therefore, are not subject to on-going Commission oversight to assure that they remain in the public interest.
Q. Do Idaho Power’s rates recover the costs of vendor contracts?
A. The reasonable and prudent costs of vendor contracts are included in Idaho Power Company’s rates. However, the Commission does not approve the contracts, it exercises ratemaking authority over the costs. The Commission may not allow the Company to recover unreasonable or imprudent expenditures in rates.
Q. How does the Astaris ESA differ from an agreement under which a vendor supplies goods or services to a regulated utility?
A. The Astaris ESA is a contract between Idaho Power, a regulated utility, and one of its customers for the supply of utility services, e.g., electricity. This special contract contains the prices and conditions under which Idaho Power provides electric service to Astaris. Idaho Power has many contracts with third-party vendors who supply power poles, wire, transformers, computer services, fuel for power plants as well as other goods and services.
Q. Please describe some of the utility services that Astaris pays Idaho Power to provide under its current ESA and amending Letter Agreement.
A. The Commission sets the service rates included in the ESA, for which Astaris pays or receives credit. In addition to demand and energy charges for electricity they also include Excess Demand Charges, Load Shedding Credits, Energy Purchase Credits, Operating Reserve charges, Imbalance credits and charges, and Power Factor charges. The ESA structures the power supply in two blocks of 120 MW and 130 MW for a total of 250 MW. The take-or-pay charges under the ESA were for 250 MW of demand and the first block of energy. The energy charge for the second block is based on market rates. The Letter Agreement changed the termination date of the ESA, reduced the take-or-pay demand charge to just the first block, and provided that Astaris would reduce its consumption by 50 MW in return for payments set out in Schedule A to the Letter Agreement (Staff Exhibit No. 111). It also provided that Astaris could call for the Block 2 energy (130 MW) but would have to pay the demand charges back to April 2001.
Q. Are the rates in the ESA “retail” rates?
A. Yes. They are rates for utility services provided to one of Idaho Power’s retail customers.
Q. Did the prior 1973 energy services agreement between Idaho Power and FMC provide for another type of energy service?
A. Yes. The 1973 energy service agreement included interruptibility provisions. Under the agreement, Idaho Power had rights to interrupt its provision of utility service to FMC as specified in the agreement. In exchange for this interruptibility, FMC paid lower rates to Idaho Power.
Q. What does interruptibility have to do with the Astaris Letter Agreement amendment?
A. In one sense, the Letter Agreement’s load reduction provisions allow for the “interruption” of service for which the customer receives compensation. Interruptibility is a regulated utility service.
Q. Based on the above discussion, what do you conclude concerning the Astaris Load Reduction Letter Agreement Amendment to the ESA?
A. The above discussion demonstrates that the Letter Agreement amendment to the Astaris ESA should be, and is subject to, the continuing jurisdiction of the Idaho Public Utilities Commission. The Letter Agreement Amendment does not stand on its own; it is appropriately and undisputably an amendment to the ESA. The Letter Agreement amendment provides for a utility service to one of Idaho Power’s retail customers. The fact that the rates for the load reduction are market based is not uncommon for this type of customer. Indeed, as previously mentioned, the energy rates for the second block of power were market based. If the then high market rates dropped sufficiently, Astaris retained the right to restart its disconnected block 2 furnaces if it paid the market based energy rates for the second block and repaid the demand charges back to April 2001.
Q. Does Idaho Power also contract for customers to reduce their consumption of power?
A. Yes, it does. These types of contracts contain load reduction or interruptibility provisions. Examples of these are the Idaho Power Irrigation Load Reduction Program, the Astaris Load Reduction Program, the interruptibility provisions of the Monsanto service agreement and the interruptibility provisions of the 1973 FMC service agreement. In Idaho Power’s Irrigation Load Reduction case (IPC-E-01-3) the Commission approved the rate and terms of the contract.
Q. Does Idaho Power also purchase power from other entities?
A. Yes. Idaho Power obtains power from various entities including other utilities, independent power producers, power brokers and PURPA Qualifying Facilities.
Q. What are the distinguishing features of load reduction or interruptible contracts?
A. 1) Load reduction or interruptible contracts are subject to Commission approval and on-going oversight to assure the public that they are in the public interest.
2) In load reduction or interruptible contracts, the customer is agreeing to not use utility power or to reduce its consumption in return for lower rates or payment from the utility.
3) The utility is reducing its demand as opposed to generating more or purchasing more power.
4) Customers with load reductions or interruptible contracts are not “selling” the power back to the utility because it is not actually receiving or taking title/possession of the power. This principle was firmly established when the Commission approved the ESA and its provision that FMC could schedule power for the second block and subsequently decide to have Idaho Power sell it elsewhere. See Staff Exhibit 110.
Why does it matter whether load reductions or interruptions provided by the customer are classified as: 1) new power flowing into the system, or 2) system power that the customer agrees to not use?
A. New power flowing into the system is purchased power and would be obtained by the utility. Power made available under a load reduction or an interruptibility contract is power that the regulated utility has an obligation to supply to its customer, except for the provisions of the contract. That contract is for the supply of utility services and is regulated, for public interest purposes, throughout its term. As previously discussed, that is not the case with power purchased from another entity.
Q. How do PURPA contracts fit into the mix of third party “vendor” contracts or utility service special contracts?
A. The Federal Public Utilities Regulatory Policies Act of 1978 (PURPA) requires that electric utilities purchase power from cogenerators and small power producers (“QFs”) at avoided cost rates established by state regulatory commissions. PURPA rates and essential terms are commonly set by contract. Because Idaho approves the rates and terms, the Commission retains jurisdiction over the contracts to provide assurance that the rates remain in the public interest. However, it should also be noted that QFs are not to be subject to utility-type regulation and it is presumed that the approved avoided cost rates will remain unchanged during the term of the contract absent the reserve power to change the rate if required by the public interest.
Q. Are the load-reduction provisions of the letter agreement appropriately treated as “purchased power?”
A. No. All of Idaho’s regulated electric utilities are required to use the FERC Uniform System of Accounts to account for utility investments, expenses and revenues. One of the accounts in the FERC Uniform System of Accounts is Account 555 – Purchased Power. Paragraph 7 of the Letter Agreement says:
“The payments to be made to Astaris referred to in paragraph 4 above are conditioned upon the Idaho Public Utilities Commission issuing an order finding such payments may be treated as a purchased power expense for purposes of Idaho Power’s Power Cost Adjustment.” (Emphasis Added) (Staff Exhibit 111)

The Letter Agreement goes out of its way to not say that load reduction power is “purchased power”. It says that the cost of load reduction power should be treated “as a purchased power expense” for purposes of the PCA.
Q. Why is this distinction significant?
A. The explanation requires a basic understanding of the PCA. The PCA captures abnormal power supply costs and passes 90% of Idaho’s jurisdictional share of those costs on to ratepayers. Abnormal power supply costs are the net of above or below normal fuel costs, purchased power costs (Account 555) and secondary power sales revenues.
The benefit of replacing a market purchase with a below market purchase is the reduction in the cost of purchased power captured in or flowed through the PCA. If a portion of the utilities load is eliminated with a customer load reduction agreement, the cost of which is not an Account 555 - Purchased Power cost, the customers receive nearly all of the benefit, 90%, and Idaho Power’s shareholders pay all of the cost. This inequity is avoided by allowing the costs into the PCA and treating them “as a purchased power expense”. Paragraph 7 of the Letter Agreement makes the exception required to remove the inequity.
Without the exception, Idaho Power has no incentive to enter into such an agreement, nor would it be reasonable to expect them to do so. If the Commission had not approved the language in paragraph 7 of the Letter Agreement amendment, the agreement allowed Idaho Power to break the agreement (paragraph 6). Idaho Power may have exercised its right under Paragraph 6.
THE DISCOUNT
Q. What is Mr. Binz’s contention concerning First Block take-or-pay payments that Astaris must make to Idaho Power under the provisions of the ESA?
A. It is Mr. Binz’s contention that Staff’s calculation of costs that would be avoided by ratepayers if the contract rates were modified as Staff proposes, should be offset with the costs that Astaris incurs under the First Block take-or-pay provisions of the ESA.
Q. Why does Staff believe that the Astaris take-or-pay payments to Idaho Power should not be used to reduce costs avoided by the Staff’s adjustment?
A. There are two reasons. First, Mr. Binz justifies the reduction by stating that the “value” of the total transaction to Astaris is the net of the load reduction revenues and the take-or-pay costs. This is not true. The economic value of the deal to Astaris is limited to the changes in costs that occurred as a result of the Letter Agreement Amendment. This clearly does not include Astaris’s take-or-pay obligation for first block power under the ESA. The value to Astaris is the market based payment it receives for a 50 MW load reduction and, under Paragraph 2, the reduction in demand charges it would have paid for 130 MW of Block 2 power. These two are additive and make the overall value to Astaris even greater than the $139.4 million shown on Staff Exhibit No. 101.
Second, Staff believes that the take-or-pay provisions in the Astaris ESA address the very circumstances that we find ourselves in today. Idaho Power Company has made substantial investments in facilities to serve this customer that were expected to be recovered in the rates charged to the customer. Astaris, as an Idaho Power customer, is now substantially gone, but the costs associated with Idaho Power’s investments continue. The take-or-pay payments Astaris is making to Idaho Power continue to pay real on-going costs that Idaho Power has incurred. To pretend or suggest otherwise that these costs should offset the Astaris windfall, is entirely inappropriate.
Q. What other reason does Astaris provide to show that prices it is scheduled to receive under the terms of the Letter Agreement are not a windfall?
A. Astaris contends that it had costs associated with the 50 MW buy back that more than offset the windfall caused by the difference in market price identified by Staff. Staff witness Carlock addresses these issues in her testimony.
Q. Should the Commission find, as proposed by Astaris, that the Astaris Letter Agreement rates not be adjusted as proposed by Staff?
A. Absolutely not. The windfall that Staff initially identified remains a windfall. The take or pay costs should not offset the Staff’s proposal as I stated previously. The windfall is paid for by Idaho Power and its customers through the PCA mechanism. It is preferential and places an excessive burden on other ratepayers to continue to pay Astaris rates under the Letter Agreement that are as high as 800% of current market rates while Idaho Power’s customers pay 90% of these costs. One customer should not receive a windfall at the expense of others.
RATE EFFECTS
Q. On Page 21 of his testimony beginning at line 5, Mr. Binz discusses the effect that Staff’s proposal would have on consumer rates. Please comment on his discussion.
A. Mr. Binz chooses to discuss only the effects of the Staff proposed rate reduction associated with modified contract rates on residential rates. While residential customer rates are important, the public interest analysis also includes impacts on commercial, industrial and agricultural sectors of the Idaho economy. For this reason I have prepared Staff Exhibit No. 112. Staff Exhibit No. 112 shows the impacts on Idaho Power customer rates for the two PCA years if the Astaris windfall is allowed. Columns D and F show the average monthly impact on bills for the two PCA years and columns E and G show the average annual impact on customer bills. Column H shows the total dollar impact on each customer class for the two years combined. The effect of Staff’s proposal is that over the two years, Idaho Power customers are left with approximately $34.8 million dollars in their pockets that does not go to Astaris for a windfall. Column H shows that residential customers get to keep more than $11 million, Idaho irrigators get to keep more than $4.5 million, large commercial and industrial customers get to keep more than $5.2 million and very large special contract customers, excluding Astaris (shown as FMC), get to keep a half million to almost $1.5 million each.
Q. Mr. Binz calculates different numbers for the monthly impacts on residential customers in terms of dollars and percentages than you show in Exhibit No. 105 and Exhibit No. 112. Please explain the differences.
A. Mr. Binz’s calculation of $0.88 per month savings for residential customers in 2002/2003 assumes the customer uses 1000 kWh. My calculation of $0.99 per month includes average monthly customer use which is approximately 1135 kWh. Mr. Binz calculates the savings associated with Staff’s proposal as a percentage from existing rates, while I calculate the savings percentage from normal rates that do not include the 2001 PCA increases. The bottom line, regardless of how savings are calculated, is that Idaho ratepayers will save approximately $34.8 million as a result of the contract changes proposed by Staff.
Q. Mr. Binz suggests that if the Commission does not modify the Letter Agreement it has the option to spread the additional costs over multiple years. Does the Commission have this option?
A. Yes, it does. The option to spread these costs to Idaho customers over multiple years are also subject to the concerns identified by Mr. Binz. Those are that circumstances that cause rate increases may be even worse in the future, and that the total amount collected from customers will be even greater due to carrying charges.
Q. Mr. Binz’s testimony implies that contracts all over the State of Idaho are in jeopardy if the Commission prospectively reforms (beginning 1/8/02) the buy back rates in the Astaris Letter Agreement. Please address the impacts of such a decision by the Commission.
A. I have already pointed out that the only contracts that the Commission can change are contracts between a utility and one of its customers that were approved by the Commission and that those contracts can only be changed on a prospective basis. In my experience, Commission investigations into changing contract rates and then actually changing contract rates are very infrequent.
Q. Mr. Binz states that future contracts with the utility will build a risk premium into future contract rates if the Commission reforms this contract. Please comment on his conclusion.
A. All businesses face risk. There are risks associated with contracts of all kinds. One of the risks that a utility customer faces when it enters into a contract for the provision of utility services, is that at some point in time the contract rates may be found to be detrimental to the public interest and be changed to conform to the public interest on a prospective basis. Mr. Binz implies that this is a new risk associated with utility service contracts when in fact utility service contracts have been modified under the public interest standard for more than 50 years. I find it hard to believe that the energy professionals and Company officials involved in the negotiation of the Letter Agreement did not know of this risk and consider it in their negotiations. It has been and continues to be an appropriate risk to consider and weigh when a utility customer contracts for utility services.
Q. Mr. Binz makes several recommendations in his testimony that the Commission should consider in place of modifying contract rates as proposed by Staff. Please discuss his recommendations.
A. Mr. Binz suggests that “prudency” may be the answer to the problem. If the Commission were to find that Idaho Power imprudently entered into the Letter Agreement, then all or part of the costs would be disallowed for recovery from ratepayers, but Idaho Power would still have to pay Astaris under the terms of their agreement. Idaho Power stockholders would take the hit. In order for a cost to be found by the Commission to be imprudent, it must be demonstrated that the Company knew, or should have known, that the decision was imprudent at the time that the decision was made. There is no evidence to support such a finding in this case. The Commission approved the Letter Agreement based on the information available at that time. Since then no new information has surfaced that would suggest that Idaho Power knew or should have known at the time of the deal that the decision was imprudent.
Q. Mr. Binz suggests that the Commission review Idaho Power’s resource planning and acquisition criteria instead of modifying the Letter Agreement rates. What comments do you have on this proposal?
A. The Commission has open cases where these issues are being addressed. However, any results of these cases will not change the fact that PCA rate adjustments in the next two years will capture and pass on to ratepayers the unjust and unreasonable costs associated with the Letter Agreement Amendment. Only reforming the contract rates on a prospective basis (beginning 1/8/02) will result in just and reasonable rates that serve the public interest.
Q. Mr. Seder and Mr. Binz both refer to the fact that Staff supported the approval of the Letter Agreement Amendment to the ESA at the time it was submitted to the Commission, is this true?
A. Yes. After an expedited review Staff did support approval of the Letter Agreement Amendment.
Q. Why did Staff recommend that the Commission approve the Letter Agreement Amendment?
A. At that time, because of the drought in the region, Idaho Power was unable to generate sufficient power to serve its customers. Because of this fact Idaho Power was faced with buying high priced power from the wholesale market to serve its customers. Therefore, the option of buying a load reduction from Astaris at a discount from forward market prices was a benefit to customers.
Q. What has happened to the price for power on the wholesale market since approval of the Letter Agreement Amendment?
A. In June of 2001, the price plunged from a high of several hundred dollars/MWh to below $50/MWh and has remained close to historical levels of $20 to $30/ MWh. Furthermore, forward market projections that I obtained from Idaho Power in December, that were derived in the exact same manner as those in the Letter Agreement Amendment, also forecast prices at historical norms.
Q. What affect has this drop in prices had on the effectiveness of the Letter Agreement Amendment?
A. The prices in the Letter Agreement Amendment are no longer effective in reducing customer rates. In fact, the Letter Agreement Amendment prices are working to substantially increase customer rates, imposing an excessive burden on ratepayers.
Q. Based on this dramatic shift in prices are the prices in the Letter Agreement still just and reasonable to Idaho ratepayers?
A. No.
Q. Does this conclude your rebuttal testimony in this proceeding?
A. Yes, it does.

IPC-E-01-43 HESSING, K (Reb) 1
2/15/02 Staff

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