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REBUTT AL TESTIMONY OF KEVIN C. HIGGINS
On Behalf of The Kroger Co.
Doing Business as Fred Meyer and Smith'
Case No. IPC-03-
March 19, 2004
REBUTT AL TESTIMONY OF KEVIN C. HIGGINS
Introduction
Please state your name and business address.
Kevin C. Higgins, 39 Market Street, Suite 200, Salt Lake City, Utah
84101.
By whom are you employed and in what capacity?
I am a Principal in the finn of Energy Strategies, LLC.
On whose behalf are you testifying in this proceeding?
My testimony is being sponsored by The Kroger Co.
, ("
Kroger ), doing
business as Fred Meyer and Smith'
Are you the same Kevin C. Higgins who has previously filed direct testimony
in this proceeding?
Yes, I am.
What is the purpose of your rebuttal testimony?
I am recommending a modification to Staffs rate spread proposal for Rate
What recommendation do you make in your rebuttal testimony?
Staff witness Dave Schunke recommends a 0.13 percent rate reduction for
Rate 9-S and a 13.31 percent rate increase for Rates 9-P and 9-T. I point out in my
rebuttal testimony that if the Commission adopts this recommended change
without modification, the price differential between primary service and
secondary service will all but disappear for Rate 9 customers. In my view, this
would result in an irrational price signal, because all other things equal, primary
service is less expensive to serve than secondary service.
As an alternative, I suggest that Rates 9-, 9-, and 9-T be combined for
rate spread purposes. The same revenue that would be generated from Mr.
Schunke s overall proposal for Rate 9 can be achieved with a 1.16 percent
increase on all the Rate 9 customers. This approach would retain a rational price
differential between Rate 9-S and 9-
Rate spread for Rate 9
What rate spread has Staff proposed for Rate 9?
As I stated in the Introduction above, Staffhas recommended a 0.13
percent rate reduction for Rate 9-S and a 13.31 percent rate increase for Rates 9-
and 9- T. This proposal is described in the direct testimony of Mr. Schunke.
What is the basis of Staff's recommendation?
My understanding is that it is based on Staffs cost-of-service analysis
adjusted to incorporate the Irrigation subsidy paid by Rate 9.
What comments do you hnve regarding Staff's rate spread recommendation
for Rate 9?
I agree with Staff that cost-of-service analysis should be given a very
strong weight in detennining rate spread. However, it is also important to have a
rational pricing regime within rate schedules. In the case of the relationship
between secondary and primary service within a rate schedule (such as between 9-
Sand 9-P) it is important for prices to indicate that/or a any given customer
I Pre-filed direct testimony of Dave Schunke, p. 3 , line 24 -po 4, line 2.
taking service at primary voltage is less expensive for the utility to serve than
taking service at secondary service. Unfortunately, however, Staffs rate spread
proposal for Rate 9 would cause the price differential between primary service
and secondary service to all but disappear. This result would not only lead to
irrational pricing within Rate 9, it would be unfair to customers who invested in
the necessary equipment to take primary service based on the current price
differential. By making the investment in such equipment themselves, primary
service customers allow the utility to conserve capital and slow the growth in
distribution system rate base.
To what extent does Staff's proposal change the price differential between
Rates 9-S and 9- P?
In Kroger Rebuttal Exhibit No. 903, I calculate the price differential
between Rates 9-S and 9-P under current rates and under Staffs proposed rates.
The analysis utilizes hypothetical customers of various sizes and load factors. A
summary ofthe results is shown in Table KCH-, on the next page.
The results show that under current rates, primary service is about 9 to 13
percent less expensive than secondary for any given customer. But under Staffs
proposal, this differential is virtually eliminated. In fact, in many cases, primary
service would actually become more expensive than secondary.
Table KCH-
Comparison of Rates 9-S and 9-
(Positive % indicates Primary is less expensive than Secondary)
Current Primary Staff Proposed
Customer Discount Primary Discount
500 kw, 45% l.f.9.41 %61 %
500 kw, 60% l.f.11.20%54%
500 kw, 75% l.f.12.41 %84%
750 kw, 45% l.f.87%07%
750 kw, 60% l.f.11.57%0.11 %
750 kw, 75% l.f.12.72%1.21 %
1000 kw, 45% l.f.10.10%1.80%
1000 kw, 60% l.f.11.78%11%
1000 kw, 75% l.f.12.87%1.39%
But doesn t Staff's analysis indicate that under its proposal, the average
price per kwh for Rate 9-P customers would be less than Rate 9-
Yes. Staff Exhibit No. 127 shows that under its proposal, the average price
per kwh for Rate 9-S would be 3.645 cents per kwh, and the average price per
kwh for Rate 9-P would be 3.369 cents per kwh. At first glance, this infonnation
might appear to contradict the table above. However, there is no contradiction.
The lower average price for Rate 9-P reflects the larger size and higher load factor
of the average customer in this group relative to Rate 9-S. These same customers
would have lower-than-average rates if they were on secondary service, as well
given their load characteristics. The problem I am pointing out is that under
Staffs proposal, for each of these primary customers individually, the primary
and secondary rates would become almost indistinguishable, even though for each
of these customers, primary service is less expensive to provide.
Why is primary service less expensive to serve than secondary service, all
other things equal?
Primary service is less expensive to provide than secondary service for
two main reasons: (1) Primary service requires fewer utility-provided facilities, as
primary customers provide their own transfonners, thereby reducing the amount
of utility capital expenditures needed to provide distribution service; and (2)
primary service incurs fewer line losses to the customers ' meter, meaning that for
each hundred kilowatt-hours delivered to a customer s meter, the utility needs to
generate fewer kilowatt-hours to serve a customer on primary service than on
secondary service. On Idaho Power s system, the line loss differential between
primary and secondary service is about 3 percent?
If primary service is less expensive to serve than secondary, how can a cost-
of-service study produce a result that leads Staff to propose raising 9-P so
much that the differential between 9-S and 9-P disappears?
Cost-of-service analysis allocates system costs to groupings of customers
based on a series of allocation factors. Generally, allocation factors are intended
to capture information about the pattern of usage of each customer group taken as
a whole, such as relative usage during a monthly system peak hour. During the
test year, the Rate 9-P group, taken as a whole, exhibited a usage pattern that was
allocated a greater increase in cost responsibility relative to current revenues than
2 Said Workpapers, pp. 3-
Rate 9-S. This was due, in part, to a higher per-unit allocation of production
costS.
Should this result be the final word on the rate spread between and Rate 9-
and Rate 9-
Not in this case. As I stated above, is important to have a rational pricing
regime that recognizes thatfor any given customer taking service at primary
voltage is less expensive for the utility to serve than taking service at secondary
servIce.
It is also important to recognize that, theoretically, for any sub-group of
Rate 9, a cost-of-service allocation could be performed that would produce results
that varied from the results for Rate 9 as a whole. These results would reflect the
mix of customers in the sub-group. An important question, then, is whether the
most appropriate criteria are being used to define the sub-group. For example, it is
useful to avoid categorizing customers into relatively small sub-groups of
otherwise similarly-situated customers. Smaller groups tend to have less diversity
with respect to their coincident peaks and their non-coincident demands. A lack of
diversity adversely impacts the per-unit charges derived for the group from the
allocation of peak-related costs.
What do you propose to address this problem?
In addition to providing time-of-use price signals, which I addressed in my
direct testimony, it is important that customers be grouped, for cost-of-service
purposes, in a manner that minimizes the likelihood of anomalous results.
3 I base this conclusion on my review ofIdaho Power Exhibit No. 42, pp. 4-, which uses a production
allocation methodology similar to Staff.
In the case of Rate 9, the customer qualifications to take service under
Rates 9-, Rate 9- P, and Rate 9- T are identical, except for the voltage level at
which service is taken. In addition, Rate 9-S is a much larger group than either 9-
P or 9-T. In this situation, allocating a demand-related function (such as
production) to Rate 9-P separately from the rest of Rate 9 might lead to
anomalous results.
I recommend that for rate spread purposes, Rates 9-, 9- P, and 9- T be
combined, and that a reasonable, cost-based price differential be retained among
them. This price differential would recognize that for any given customer taking
service at primary voltage is less expensive for the utility to serve than taking
service at secondary service.
In Kroger Rebuttal Exhibit No. 904, I apply the same overall revenue
requirement to the aggregate of9-, 9-, and 9-T as in Staffs recommendation
but spread it on an equal percentage basis across the entire Rate 9. This results in
a 1.16 percent increase on all the Rate 9 customers. This approach would retain a
reasonable price differential between Rate 9-S and 9-P. I recommend that this
modification to Staffs Rate 9 rate spread be adopted by the Commission.
Does this conclude your rebuttal testimony?
Yes, it does.
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Kroger Rebuttal Exhibit No. 904
Case No. IPC-03-
c. Higgins
3/19/04
Summary of Schedule 9 Rate Spread Using
IPUC Staff's Proposed Revenue Requirement
Schedule No.
STAFF PROPOSED STAFF PROPOSED KROGER PROPOSED
Large Large Large
General General General
Service Service Service
Secondarv Primary & Trans.Total
9P & 9T , 9P & 9T
17,299 116 415
667,376,237 347,050 749 014 426,986
97,349 138 10,319,874 107 669,012
(123,369)373 312 249 943
97,225,769 693 186 108 918 955
13%13.31%16%
2003 Average No. of Customers
2003 Sales Normalized (kWh)
Current Base Revenue ($)
Staff Proposed Final Rev. Adjustments ($)
Staff Proposed Base Revenue ($)
Percent Change
Data Source: IPUC Staff Exhibit No. 127 (D. Shunke)