20120217Paul Direct.pdf

McDevitt & Miller LLP
Lawyers
[phone]
[phone] (Fax)
RECEIVED
420 W. Bannock Street lOll FEB 11 PM~:' 5
P.o. Box 2564-83701
Boise, Idaho 83702
Chas. F. McDevitt
Dean J. (Joe) Miler
Februar 17, 2012
Via Hand Delivery
Jean Jewell, SecretarIdao Public Utities Cotnssion
472 W. Washigton St.
Boise, Idao 83720
Re: Case No IPC-E-12-02
Hoku Materials, Inc.
Dear Ms. Jewell:
Enclosed for fig are an orial and nie (9) copies of the Direct Testiony of Scott Paul in
Support of Settement Stipultion. A copy of the Direct Testiony has been desigated as the
"Reporter's Copy." In addition, a disk contag MS Word version of the Direct Testiony is
enclosed for the Reporter.
If you have any questions, please do not hesitate to contact me.
Kidly retu a staped copy.
Very Truy Yours,
\\c~wril
~.Mier
DJM/hh
RECEIVED
Dean J. Miller (ISB No. 1968)
Chas. F. McDevitt (ISB No. 835)
McDEVITT & MILLER LLP
420 West Banock Street
P.O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
joe(gcdevitt-miller.com
2011 FEB 11 PM~: 15
Attorneys for Hoku Materials, Inc.
BEFORE TH IDAHO PUBLIC UTILITIES COMMSSION
IN THE MATTER OF THE PETITION OF Case No. IPC-E-12-02
HOKU MATERIALS, INC. FOR
REPARTIONS AND REFORMATION
OF ITS AMNDED SPECIAL
CONTRACT ~TH IDAHO POWER
COMPANY
DIRCT TESTIMONY OF SCOTT PAUL
IN SUPPORT OF SETTLEMENT STIPULATION
ORIGINAL
..', .', "
1 Q.Please state your name and business address.
2 A.My name is Scott Paul and my business address is One Hoku Way, Pocatello, Idaho
3 83204.
4 Q.By whom are you employed and in what capacity?
5 A.I am employed by Hoku Corporation, as its Chief Executive Officer ("CEO").
6 Q.Please describe your duties and responsibilties as CEO of Hoku Corporation.
7 A.I am the principal executive offcer for Hoku Corporation and its subsidiar companies,
8 including Hoku Materials, Inc. ("Hoku"). I report to Hoku Corporation's board of
9 directors, of which I am one of seven members. I also serve as a director of each
10 subsidiar company, including Hoku. My primar responsibilty is to manage the
11 operations of Hoku Corporation, and to work closely with the management team of each
12 subsidiar company to ensure that the companes are executig with the operatig plan
13 and budget approved by the board of directors. My direct reports include our principal
14 fiancial and accounting offcer, human resources, the president of Hoku Corporation,
15 and the president of each of our two primar operating companes: Hoku Materials and
16 Hoku Solar.
17 Q.Have Hoku, Idaho Power Company ("Idaho Power") and the Commission Staf entered
18 into a Stipulation resolving all the pending issues in ths proceeding?
19 A.Yes they have, and the Settlement Stipulation is being filed with the Commission at the
20 same time as ths testimony.
21 Q.What is the purose of your testimony in ths matter?
22 A.I will first describe Hoku's business operations and the existing ageement for electrc
23 service between Hoku and Idaho Power. I will then describe the circumstaces that made
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Hoku Materials Inc.
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it necessar to Hoku to intiate ths proceeding by the filing of the Complaint for Contract
Reformation. I will then discuss the key featues of the Settlement Stipulation. Finally, I
will urge the Commssion to approve the Settlement Stipulation without chage or
condition.
Please describe the manufactug facilty that Hoku is constrctig at Pocatello, Idaho.
Hoku is constrcting a manufactung facilty at Pocatello for the purose of
manufactung, marketing and selling polysilconto the solar industr. Constrction
began in 2007, and in 2010, we successfuly completed our first production
demonstration. When fuly operational, our designed production output will be 4,000
metrc tons per anum, which would enable the production of approximately 500
megawatts of photo voltaic, or PV, modules each year. We have pre-engineered and
constrcted our plant inrastrctue to support fuer expansion to 8,000 metrc tons per
year, or one gigawatt ofPV modules. To date, we have invested more than $600 millon
in the engineering, constrction, and operation of our plant. We plan to commence
operations in 2012.
Has Hoku paid for the cost of constrcting necessar substation and transmission lines to
serve the facilty?
Yes. Hoku has paid to Idaho Power the entire cost of constrcting facilties to serve
Hoku's load. In September of2008, Hokuand Idaho Power entered into an agreement
whereby Hoku agreed to pay the entire cost of constrcting approximately six miles of
138,000 volt overhead transmission, a new 138,000-13,800 volt substation to supply up
to 82 MW s with two 67 MV A transformers. Hoku also paid for required additional
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facilties at other Idaho Power existig substations. Hoku has fuly pedormed that
agreement and ha paid to Idaho Power $18,049,182 for constrction of the facilities.
Please describe the expected electrc power usage of the facilty when it is fuly
operational.
The conversion of silcon to polysilcon is extremely energy intensive and is
accomplished though the use of large electrc power reactors. When fuly operational,
the expected monthy demand will be approximately 82,000 KW. When fuly
operational, it is expected that the Hoku facilty will produce approximately $35.9 milion
per year of revenue to Idaho Power.
Because of the expected level of electrc power demand, was it necessar for Hoku and
Idaho Power to enter into a special contract for electrc service?
Yes. The expected level of electrc power demand exceeds that contemplated by Idaho
Power's Tarff Schedule 19, and therefore a special contract was required.
Please briefly describe the background of the agreement entered into by Hoku and Idaho
Power.
On September 17, 2008, Hoku and Idaho Power entered into an Agreement for Electrc
Servce for the supply of electric power and energy to the Facilty. On June 19,2009,
Hoku and Idaho Power entered into an Amended and Re-stated Agreement for Electric
Service ("AESA") which superseded and replaced the September 17,2008, Agreement
for Electrc Servce. On July 24, 2009, the Commission entered Order No. 30869, Case
No. IPC-E-08-21 approving the AESA. A tre copy of the AESA is attached to the
Settlement Stipulation.
Please describe the portons of the AESA that are relevant to ths proceeding.
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Hoku Materals In.
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Pursuant to the AESA, Hoku's demand and energy requiements are divided into two
segments for pricing puroses, referred to as the First Block and Second Block. The
AESA defines First Block Contract Demand as the number of kilowatts Idaho Power has
agreed to make available as listed in Section 6 of the AESA. These amounts are fied by
month in the AESA. First Block Energy is the number of kilowatt hours determined by
multiplying the First Block Contract Demand by the number of hours in the biling
period, multiplied by the Contract Load Factor. Under the AESA, commencing in April
of2011, Hoku became obligated by the terms of the AESA to pay the First Block
Demand and Energy Charges regardless of whether it actually consumed demand or
energy. Ths featue of the AESA has been referred to as a "tae or pay" obligation.
Were there circumstances that made it impossible for Hoku to begin consumg the
expected level of demand and energy in April of2011?
Yes. As I explained in my Affidavit in Case No. IPC-E-II-28, in 2011, the spot market
price for solai-grade polysilcon, the product to be manufactued by Hoku Materials,
dropped below $30 per kilogram, its lowest point in recent memory. When Hoku
Materials entered the polysilcon business in 2006, the spot market price for polysilcon
was approximately $200 per kilogram, customers were signg 10-year fixed price
contracts, and industr analysts were forecasting robust demand in the years to come. In
2008, market prices climbed even higher, in some cases exceeding $500 per kilogram.
The high demand for polysilcon led to unprecedented increases in polysilcon production
capacity from incumbent and new producers; and, in the second half of 20 11, supply
. began to exceed demand by an extaordinarly wide margin. What was expected to be a
short-term glut has tued into a prolonged downward cycle in the market, with today's
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prices falling below the industr's average production costs. Ths is expected to continue
for at least the next six months, until the excess inventory is consumed by the
downstream solar cell market. In the meantime, to mitigate losses, many polysilcon
plants around the world are reducing their production output or idling plants. This
market sitution was not generally foreseen by industr analysts, and is not withn the
control of Hoku Materials.
Did the tae or pay provision of the AESA create financial burdens for Hoku?
Yes, in an extreme way. The First Block Energy charge is Hoku's largest single operating
expense. Hoku became obligated to pay the First Block Demand and Energy charges in
April, 2011. Hoku was not physically interconnected to the Idaho Power system in April,
2011, and did not become interconnected until November, 2011. Between April and
November, Hoku paid to Idaho Power Company a total of$II,572,211 for First Block
Demand and Energy minimum charges; despite the fact Hoku did not consume any
energy. In November, December and Januar, afer Hoku was physically interconnected,
its actu energy consumption was at a minimalleve1, but Hoku remained obligated to
pay contractual minums under the take or pay provision.
Please describe the circumstances that lead to the filing of the Complaint for Contract
Reformation in this proceeding.
Idaho Power's invoice to Hoku for service in November, 2011 was in the approximate
amount of $1.8 millon and Hoku did not have sufficient fuds on hand to pay the invoice
when it became due. Hoku communcated ths concern to Idaho Power, and Idaho Power
issued a Notice of Termnation of Servce. In response, Hoku filed a Complaint
Contesting Termination of Service on December 29,2011, Case No. IPC-E-II-28.
Paul, Di 5
Hoku Materials Inc.
1 Q.Please describe the subsequent activity in Case No. IPC-E-II-28.
2 A.With the consent of the paries, the Commssion adopted an expedited schedule for
3 consideration of the Complaint and set an Oral Arguent for Janua 11,2012, afer
4 givig the paries the opportty for wrtten submissions. Whle Case No. IPC-E-II-28
5 was pending, Hoku filed the Complait for Contract Reformation in ths case. On
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6 Janua 13,2012, the Commission issued its Fin Order No. 32437 in the IPC-E-II-28
7 case, requirig that Hoku make payments for the November and December invoices.
8 Hoku subsequently made those payments, as required.
9 Q.Are there portions of Order No. 32437 that are relevant to ths case?
10 A.Yes. The Order provided:
11 We also direct Idaho Power and Hoku to imediately enter into negotiations
12 regarding Hoku' s Petition to reform the amended special contract. Staff counsel
13 shall faciltate the negotiation in an effort to determe whether the paries can"
14 settle the issue in Hoku's reformation petition. Without deciding the issue, we
15 advise the paries that waiver of the first block energy charge beginng with the
16 Januar 2012 bil should be par of their negotiations. Order No. 32437, Pg. 11.
17 The Order also required Staff Counsel to provide a progress report by Febru 1,2012.
18 Q.Did Hoku, Idaho Power and the Commission Sta comply with this diective?
19 A.Yes. Between Janua 23, 2012 and Febru 1,2012 the paries met on four occasions,
20 in an effort to reach a settlement. A final meeting was held on Februar 2,2012 as a
21 result of which the paries reached an agreement in principle on terms that are now
22 incorporated into the wrtten Settlement Stipulation.
23 Q.Please describe the negotiation process between the paries.
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In my opinion the negotiation process was conducted effciently, and in a professional
way. Each par was candid in identifyg issues of importance from their perspective,
but at the same time each par was willng to consider the needs and desires of the
several stakeholders, includig the ratepayers.
Please describe the key featues of the Settlement Stipulation from Hoku's perspective.
Paragraphs 6.1 though 6.6 of the Settlement Stipulation set fort terms upon which the
AESA will be reformed. In sumar, those provisions are:
1. Between Janua 1,2012 to June 30, 2013 (18 months) (the "Deferral Period")the
monthly Biled Mimum Energy charge will be reduced to $800,000 to be
applied to the curent First Block Energy charges plus the curent First Block and
Second Block Demand chages.
2. On July 1,2013 there will be a retu to existig contract payment strctue
(minimum approx. $2 milion per month).
3. To cover the cost difference between the curent contract's Minimum Biled
Energy charge and the proposed amendment to the Minmum Biled Energy
charge for the Deferral Period, Idao Power shall receive a $3.8 milion extra
payment due upon Commission approval of the Settlement Stipulation payable to
Idaho Power as follows: a) Idao Power shall immediately apply $2 milion of the
existing $4 milion deposit it has to the $3.8 milion extra payment. Beginnng
with its Januar 2012 invoice, Hoku shall pay to Idaho Power, in addition to any
amounts provided for under ths settlement proposal, an additional amount equa
to $100,000 per month for a period of 18 months which shall be applied to the
remaining amounts due of the extra, one-time payment of$3.8 milion.
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4. An extension of the term until December 2014 (12 month extension) with the
curent Block 1 Energy charge being reduced to the curent Block 2 Energy
charge (i.e. all energy charges would be at embedded cost based rates) effective
beging with the Janua 2014 invoice for servces rendered in December 2013.
5. Hoku agrees to a cap on its monthy power demand durng the Deferral Period of
20 MWs. Prior to increasing the cap, Hoku must provide Idaho Power a firm 12-
month ramp-up schedule at least 6-months in advance of any change in energy
consumption above 20 MW s. Idaho Power would agee to provide Hoku
additional power above 20 MWs 30 days afer receipt of any requied additional
deposit amounts. Hoku agrees that failure to comply with the ramp schedule
and/or any additional deposit requirements as a result of Hoku's request for
additional energy relieves Idaho Power of the obligation to provide Hoku with the
additional power requested.
Are these provisions agreeable to Hoku?
Yes. In the end, I feel that we negotiated a solution that addressed Hoku's primar
concerns of obtaining relief from the near-term cash flow burden while staying connected
to the grd and maintanig flexibilty to ramp-up production as the market conditions
improve. Hoku also understood that a re-strctug of the AESA would require tht
Idaho Power and other ratepayers be held harless and I believe the settlement terms
accomplish that objective.
If the Settlement Stipulation is approved will Hoku work cooperatively with Idaho Power
to prepare and submit to the Commission a Second Amended and Restated Electrc
Servce Agreement contaning terms consistent with the Settlement Stipulation?
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Yes. Hoku will devote the effort necessa to prepar and submit an amended agreement
within th (30) days of the Commssion's Fin Order.
As par of the Stipulation Agreement, is Hoku waivig any clai for reparations relating
to prior payments?
Yes. In consideration of the other terms of the Settlement Stipulation, Hoku is willng to
waive any clai for reparations. Hoku also agrees that upon submission of an amended
agreement its Complaint may be dismissed.
Has Hoku made the payment required by paragraph 6.1 of the Settlement Stipulation?
Yes. On today's date, the first payment of $932,000 was wie transferred to Idaho
Power.
Do you believe the Commssion should approve the Settlement Stipulation?
Yes. For the reasons discussed above, Hoku urges prompt approval of the Settlement
Stipulation without condition or modification.
Do you have any concluding observations?
Yes. Hoku wishes to express its appreciation to the Commssion Sta for its effort in
faciltating a settlement. I believe the gudance provided by Staff allowed the pares to
reach a compromise that takes into account the interests of all concerned.
Does that conclude your testimony?
Yes it does.
Paul, Di 9
Hoku Materials Inc.