SederTestimony.DOC

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

* * *

IN THE MATTER OF THE §
PETITION OF THE COMMISSION §
STAFF REQUESTING THAT THE §
COMMISSION INVESTIGATE THE § CASE NO. IPC-E-01-43
BUY-BACK RATE IN THE LETTER §
AGREEMENT ENTERED INTO §
BY IDAHO POWER COMPANY §
AND ASTARIS LLC §

Direct Testimony and Exhibits of
Alan W. Seder

On Behalf of

ASTARIS

January, 2002

PERSONAL BACKGROUND
Q. Please state your name and business address for the record.
A. Alan W. Seder, 622 Emerson Road, Suite 500, Saint Louis, Missouri 63141.
Q. By whom are you employed, and in what capacity?
A. I am employed by Astaris LLC, currently as Vice President Sales and Marketing. Before recently taking that position, I served as Director of Business Development.
Q. Please describe the job responsibilities you had when you were Director of Business Development.
A. Functionally, at Astaris, that position meant I was the lead person on special projects, including such projects as negotiating our electric supply arrangements with Idaho Power for our Pocatello operations. I was personally involved in the negotiations with Idaho Power that led to the buy-back agreement under review in this case.
Q. On whose behalf are you testifying in this proceeding?
A. Astaris LLC, Astaris Idaho LLC, and FMC Corporation, who have intervened jointly in this case and who, for simplicity, I refer to collectively as “Astaris” unless further clarification is required.
ASTARIS WITNESSES
Q. Who are the other witnesses testifying on behalf of Astaris?
A. Ms. Margaret McCarvill, Astaris LLC’s Chief Financial Office and Vice President of Business Development, is offering testimony that quantifies the costs incurred by Astaris in performing and relying on the buy-back agreement with Idaho Power. Also, Mr. Ronald Binz, a utility industry expert and consumer advocate who was formerly the Director of the Colorado Office of Consumer Counsel and President of the National Association of State Utility Consumer Advocates (NASUCA), is offering testimony to address regulatory policy concerns regarding abrogation of the buy-back contract.
SUMMARY AND PURPOSE OF TESTIMONY
Q. Please summarize the purpose of your testimony.
A. I will describe Astaris’ negotiations and contract with Idaho Power for its buy-back of 50 megawatts (MW) of electricity otherwise to be delivered to Astaris for one of its two energy-intensive production furnaces at its Pocatello operations. The two-year buy-back contract (from April 2001 through March 2003) was executed on March 15, 2001, subject to approval by the Idaho Public Utilities Commission (the “Commission” or “PUC”), and approved by the Commission in April of 2001. I also will explain that Astaris’ subsequent decision to shutdown its last remaining production furnace and cease its Pocatello operations before 2003 was neither known nor expected when the buy-back contract was negotiated, executed and approved.
DESCRIPTION OF POCATELLO FACILITIES AND OPERATIONS
Q. Please describe the nature of Astaris’ Pocatello facilities and operations.
A. The Pocatello phosphorus plant was constructed beginning in 1948, with the first electrical arc furnace coming on line on July 1, 1949. By November 30, 1952 the plant had four electrical production furnaces. As operations developed, the four furnaces would convert phosphate shale, silica and coke into elemental phosphorus. With four furnaces operating, the plant would require an instantaneous power load capability of 250 MW to melt the furnace feed and would routinely demand 220 to 230 MW on a 24-hour, 365-day basis. Supporting the furnaces are ore handling, crushing, sizing and briquetting operations, as well as an open pit mine to supply the shale, a coking operation, and an open pit silica mine.
Q. What arrangements are in place for electric service at the Pocatello facilities?
A. Under our existing electric service agreement (ESA) with Idaho Power, Astaris receives electricity in two blocks, Block 1 consisting of 120 MW based on a regulated rate, and Block 2 consisting of 130 MW based on market prices.
CIRCUMSTANCES SURROUNDING THE BUY-BACK TRANSACTION
Q. Please describe the circumstances facing Astaris in late 2000.
A. In late 2000, Astaris experienced rapid escalation of market prices for Block 2 power purchases. In the period from August 2000 through March 2001, immediately before the buy-back agreement, production was limited at the facility due to the high price of electricity in the regional market. During most of that time, we used only two furnaces supplied with Block 1 power, although for a portion of November and December of 2000 three furnaces were in operation. This situation was of great concern to Astaris, and it drove Astaris to consider ways to purchase additional power more cost effectively.
Q. Did Astaris and Idaho Power discuss the power supply and pricing situation?
A. In December of 2000, Idaho Power approached Astaris and asked Astaris to consider curtailing operations at Pocatello and selling back to Idaho Power a portion of its Block 1 and Block 2 power to help Idaho Power manage a critical power shortage it anticipated. Although Astaris could not spare the power and in fact was seeking additional power resources to meet our end customer needs, our concerns about power supplies and prices ultimately led to our agreeing to sell Idaho Power an option to purchase a portion of Astaris’ power during peak load conditions for a period in late December.
Q. What happened next?
A. Following that event, Astaris continued to look at how best to secure cost-effective incremental power. In late 2000 and early 2001, Astaris continued to discuss alternatives with Idaho Power. During discussions in January of 2001, Idaho Power suggested that Astaris should simply sell its 120 MW of Block 1 power back to Idaho Power and shut down all its furnaces and phosphorus production in Pocatello. This buy-back concept would allow Idaho Power to reduce its power supply needs and to avoid the rapidly escalating cost of acquiring power.
Q. What was the result of the January 2001 discussions with Idaho Power?
A. On February 8, 2001, Idaho Power transmitted to us a “Discussion Offer Regarding Closure of Astaris Pocatello Plant,” noting that “the Pacific Northwest and Idaho Power Company are projecting a shortage of electric power for the year 2001” and proposing that Astaris reduce its Pocatello plant’s power usage to 10 MW through the end of 2001. Of course, reduction of Astaris’ demand to only 10 MW would not have allowed us to operate any of our four furnaces. A copy of Idaho Power’s February 8, 2001 proposal is attached as my Exhibit 201.
ASTARIS REJECTED A SHUT DOWN OF ITS POCATELLO OPERATIONS
Q. What was Astaris’ response to Idaho Power’s February 8, 2001 proposal that Astaris, in effect, close its Pocatello operations?
A. At that time, recognizing that Astaris was unlikely to be able to secure Block 2 power at cost-effective market rates, we had already made plans to shut down only two of our four furnaces, but we at Astaris did not believe it would be feasible to completely shut down our Pocatello operations. Accordingly, at that time we informed Idaho Power that Astaris was unable to accept complete shutdown of the Pocatello plant.
Q. Why is Astaris’ refusal to shut down completely in early 2001 important now?
A. The PUC Staff’s Petition requesting the Commission to initiate this proceeding implies that Astaris somehow knew early in 2001 that it would be shutting down both of its remaining production furnaces and closing its Pocatello operations during the April 2001 to March 2003 term of the buy-back contract. If that were true, Astaris would not have rejected Idaho Power’s proposal of February 8, 2001 to pay Astaris for shutting down all of its Pocatello furnaces and, in essence, closing its Pocatello operations.
ASTARIS AGREED TO IDLE A THIRD FURNACE ONLY
Q. After Astaris advised Idaho Power that Astaris could not agree to a complete shut down of its Pocatello facilities, what happened?
A. Astaris indicated to Idaho Power that while it could not at that time consider a complete shutdown, Astaris would consider selling back a portion of the Block 1 power. Idaho Power indicated it was forecasting a substantial ongoing shortfall in its power supply and was preparing to purchase a long-term 50 MW strip of power on the market. A 50 MW buy-back from Astaris was considered an ideal lower cost alternative. Accordingly, on March 8, 2001, Idaho Power transmitted a proposal that it buy back 50 MW of the 120 MW of Block 1 power that Astaris was entitled to under the ESA with Idaho Power, leaving Astaris with only 70 MW to consume at its Pocatello operation.
Q. What did Idaho Power’s March 8, 2001 proposal, if accepted, require Astaris to do at Pocatello?
A. Astaris would be required to close one of its two remaining production furnaces. Once such a decision was made, it would be irreversible, as we advised Idaho Power, and later the Commission and its Staff.
Q. At the time of Idaho Power’s March 8, 2001 proposal, had Astaris already decided to shut down its third furnace?
A. No, not at all. Before Idaho Power’s March 8, 2001 proposal, Astaris had plans to shut down only two of our four furnaces in Pocatello. In fact, this same question was asked at a Commission public hearing in Pocatello on March 27, 2001 regarding Idaho Power’s power cost adjustment (PCA), and Astaris representative Paul R. Yochum responded as follows:
Q. But were you really heading, though, for a one-furnace operation [in 2000 and 2001]?
A. No, absolutely not. We were anticipating stabilizing at a two-furnace operation. That’s why the company spent well over $200 million in environmental improvements so that we could meet the air, water, and waste permits that would allow us to operate beyond 2000.
3/27/01 Hearing Transcript at 32-33. As of March 2001, when Idaho Power first proposed the 50 MW buy-back transaction and shifting to a one-furnace operation at Pocatello, we had not performed any detailed analysis of a one-furnace operation.
Q. What was Astaris’ response to Idaho Power’s March 8, 2001 proposal to buy-back 50 MW of the 120 MW to which Astaris was entitled from Idaho Power?
A. On March 15, 2001, Astaris agreed to idle one of its two remaining production furnaces for a two-year (April 2001 to March 2003) period. This voluntary load reduction by Astaris reduced Idaho Power’s requirement to secure expensive market-priced purchased power by 50 MW. Astaris’ buy-back transaction with Idaho Power was executed in a March 15, 2001 Letter Agreement, attached as my Exhibit 202, also known as the “buy-back contract” or “voluntary load reduction agreement.”
Q. Why did Astaris agree in March of 2001 to idle one of its two remaining furnaces?
A. We believed, as did Idaho Power, the Commission Staff and virtually all electric industry observers, that electricity rates would be even higher in the summer of 2001 and would remain abnormally high for some time. In the face of projected electricity rates that would render us uncompetitive and the threat of curtailment, and in light of Idaho Power’s proposal to buy-back 50 MW of power for a fixed price, we decided to idle one of our two remaining furnaces and use the revenue generated from the Idaho Power buy-back to acquire substitute raw materials and offset lost sales opportunities as described more fully in Ms. McCarvill’s testimony.
Q. Was the decision to idle one of the two remaining furnaces irreversible?
A. In a relative short-term sense, yes. The issue here was not the physical capability of restarting the furnaces if economic power were made available. The irreversibility comes from the alternative raw material supply commitments, supply chain investments, downstream plant investments to accommodate alternative raw material sources, and the customer impacts. Accordingly, Astaris could not be left in the position of having an obligation to consume 120MW after making changes that could not readily be reversed to its operations to utilize only 70 MW of power. At the same time, however, Astaris felt strongly enough about the possibility of returning to a more-than-one-furnace operation that in the buy-back agreement Astaris negotiated the right to return as a system customer with 120MW of power available.
Q. Was the difficulty of restarting the third furnace communicated to Idaho Power and others?
A. Yes. We made clear to Idaho Power and the Commission Staff that, once made, the decision to idle a furnace starting in March or April was not reversible in the short term. Because of its concern about making such a significant change in its operations, Astaris insisted on a transaction with Idaho Power that would (a) remain absolutely confidential until made public, (b) allow the buy-back to proceed “off-system as a non-operating transaction” if the Commission elected not to incorporate the load reduction costs into the power cost adjustment, and (c) be resolved very quickly.
The Buy-back Specified a Fixed-Price Schedule of Payments
Q. What price was specified in the buy-back contract?
A. Idaho Power proposed, and Astaris agreed, that the two-year fixed-price schedule for the electricity sold back to Idaho Power would be based on Idaho Power’s then-current market price projections, less a 13.5% discount. The specific fixed-price schedule is attached to the Letter Agreement, my attached Exhibit AWS-2.
Q. Why was there a discount from market prices?
A. The discount was intended to assure that Idaho Power (and its rate payers if the Commission allowed the buy-back to be incorporated into regulated rates) would benefit by securing power at below then-prevailing market prices. Idaho Power indicated that it must show a benefit versus simply following through on its plan to purchase a long-term 50 MW strip from the power market.
Q. Why was the price fixed instead of allowed to move with the market?
A. Idaho Power and the Commission Staff wanted to lock in a fixed price. They were not willing to take the risk that market prices for electricity in the region would rise even higher. Instead, under the approved buy-back transaction, Astaris effectively agreed to bear that risk for two years because Astaris was agreeing to Idaho Power’s fixed price schedule and could not seek any higher price for its power over that period even if market prices rose further.
Q. Under the approved buy-back transaction, who was to bear the risk of falling market prices?
A. Because Idaho Power and the Commission Staff wanted to lock in the price based on a fixed schedule, the risk of falling market prices was borne by Idaho Power and its ratepayers.
THE COMMISSION APPROVED THE BUY-BACK CONTRACT BASED ON A SCHEDULE OF FIXED PRICES
Q. Did the Commission address and approve the buy-back transaction?
A. Yes. Once the buy-back contract was executed, it was submitted to the Commission for approval.
Q. What options did the Commission have with respect to the buy-back agreement and the issue of market price risks?
A. According to Order No. 28678 in Case No. IPC-E-01-9, the Commission faced two options. First, the Commission could have authorized Idaho Power to sell the 50 MW “off-system as a non-operating transaction.” This option would have assigned the benefits and risks of the buy-back contract to the shareholders of Idaho Power and its affiliates. Second, the Commission could have approved the buy-back as a purchased power expense and ordered Idaho Power to use the resource to meet Idaho Power’s retail needs. This option would have assigned the benefits and risks of the buy-back contract to Idaho Power’s customers.
Q. What did the Commission do in exercising its jurisdiction over Idaho Power with respect to the buy-back contract?
A. The Commission ordered Idaho Power to use the contract as a system resource for Idaho retail customers. The Commission stated:
The Commission finds that the Letter Agreement has considerable value because it allows 50 MW of reduced load to be made available to serve all Idaho Power system customers during this time of volatile energy market prices and reduced generation capacity due to low water conditions. The Commission also finds the price which Idaho Power will pay Astaris for this reduced load to be reasonable.
Order No. 28678 at p. 5.
STAFF RECOGNIZED THE DOWNWARD PRICE RISK WHEN SUPPORTING THE BUY-BACK TRANSACTION
Q. Did the Staff of the Commission participate in the Commission’s review and approval of the buy-back contract?
A. Yes. The Staff’s Comments in that proceeding expressly acknowledged “[t]he risk associated with the Agreement, when compared to the market purchase alternative, is that actual market prices will turn out to be lower than the price paid for the load reduction.” Staff Comments at p. 3. Acknowledging this risk, Staff supported the fixed schedule of prices established in the Letter Agreement for the buy-back noting “the prices paid for the Astaris load reduction under the Agreement appear to be lower than reasonably projected market prices and comparable on average to prices paid for other resources.” Staff Comments at p. 3. Further, Staff opposed treating the contract as a non-system transaction because the benefits (and risks) of the contract would then accrue solely to Idaho Power and its affiliate. Staff Comments at p. 6.
Q. Did Astaris believe that the fixed-price schedule of prices for the buy-back would be honored?
A. Yes, we firmly believed that the Commission-approved fixed price schedule of prices would be honored, and we based our actions and expenditures on the buy-back contract and on the Commission’s approval of that contract. We had made clear to all concerned that Astaris was making a decision it could not reverse over any short term period.
ASTARIS’ DECISION TO IDLE ITS LAST FURNACE AND CLOSE ITS POCATELLO OPERATIONS
Q. Did Astaris know, in March and April of 2001 when the buy-back contract was being executed and approved, that its last production furnace would be shut down and its Pocatello operations closed before the end of the buy-back contract term?
A. Absolutely not. From Astaris’ perspective, the buy-back arrangement hopefully would stabilize the situation at Pocatello for the longer term while we pursued our long-term objective to decrease reliance on (but not completely eliminate) elemental phosphorus as a raw material source in favor of lower-cost purified phosphoric acid. At the time of the buy-back transaction, the closure of Pocatello was a low probability event, relegated to the distant and uncertain future.
Q. Did Astaris mislead the Commission or Idaho Power in any way regarding closure of its Pocatello operations during the process of negotiation, execution or approval of the buy-back contract?
A. Absolutely not. Astaris specifically restricted the buy-back contract to idling a third furnace and Astaris has fully performed its obligations to shut down the third furnace under the buy-back contract. The fourth and last furnace was not in any way involved in the buy-back contract executed by Idaho Power and approved by the Commission.
Q. Did the buy-back agreement address the last operating furnace in any way?
A. No. The buy-back agreement did not address either operation or shutdown of the last furnace--the last furnace was simply not a part of the buy-back contract one way or the other. In fact, at Astaris’ insistence, the March 15 buy-back contract specifically committed the parties to negotiate in good faith on a replacement for the electric service agreement for service to the Pocatello facilities after the buy-back agreement ended in March of 2003. As late as May 30, 2001, in attempting to resolve a billing dispute with Idaho Power, I confirmed Astaris’ plan to continue to use the 70MW of power for our one remaining furnace even after the buy-back concluded in 2003.
Q. When was the business decision made to close the Pocatello operation and shut down the last furnace?
A. Astaris’ parents, FMC and Solutia, made a preliminary decision on September 14, 2001, and the final decision to close the Pocatello operation was not made until October 5, 2001.
Q. What is happening now at the Pocatello site?
A. As we have advised Idaho Power, for the time being, we are using roughly 3 MW of power to operate two boilers and auxiliary systems to maintain the plant in a safe and environmentally secure condition and to preserve systems that may be used in the future clean-up and restoration of the site. Twenty-two hourly and eleven salaried employees remain on site for these purposes.
CONCLUSION
Q. Does that conclude your testimony?
A. Yes.
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SEDER, Di
ASTARIS
IPC-E-01-43