HomeMy WebLinkAboutTaylor Rebuttal Testimony.pdfBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Application of )CASE NO. PAC-E-01-16
PacifiCorp, dba Utah Power & Light )
Company for Approval of Interim )
Provisions for the Supply of Electric )Rebuttal Testimony of
Service to Monsanto Company )David L. Taylor
______________________________ )
PACIFICORP
Taylor, Re - 1
PacifiCorp
Q.Please state your name, business address and position with PacifiCorp dba Utah Power1
& Light Company (the Company).2
A.My name is David L. Taylor. My business address is 825 NE Multnomah, Suite 800. I3
am the Cost of Service Manager at PacifiCorp.4
Q.Are you the same David L. Taylor that previously filed direct testimony in this case?5
A.Yes.6
Q.What is the purpose of your testimony?7
A.I will explain how PacifiCorp developed its proposal for pricing service to Monsanto. I8
will do this in the form of a decision tree type of analysis. I will discuss the various9
decision points, explore the available alternatives at each decision point, and explain the10
options selected by PacifiCorp and the resulting pricing proposal. Along the way, I will11
rebut specific positions taken by Mr. James Smith, Mr. Richard Anderson,12
Ms. Kathryn Iverson, and Dr. Alan Rosenberg who represent Monsanto, Mr. David13
Schunke of the IPUC staff, and Mr. Anthony Yankel who represents the Idaho14
Irrigation Pumpers Association.15
Q.Is PacifiCorp willing to provide interruptible service to Monsanto?16
A.Yes. The contract terms described in the testimony of Bruce Griswold and Stan17
Watters constitute interruptible service as that term has been used in our retail contracts.18
Q.What are the primary decisions that need to be made in developing a pricing proposal19
for service to Monsanto?20
A.There are four primary decisions that need to be made:21
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PacifiCorp
1.What pricing standard should be used to develop the contract rate? There are1
two standards generally applied to develop a contract rate. They are: (a) Cost of2
Service and (b) Contribution to Fixed Costs.3
2.What cost of service methodology should be used? In this case PacifiCorp has4
presented an embedded cost of service study that applies the traditional embedded cost5
of service methodology used before the Idaho Commission. The Monsanto witnesses6
present cost of service results that employ a number of modifications to this7
methodology.8
3.How should the Commission value the Monsanto interruptible terms so an9
appropriate credit to the firm service rate can be determined? Three general approaches10
are presented in this proceeding. One approach is to compare the prices, or discounts11
from standard tariff, for other interruptible customers. The next is to include only a12
portion of Monsanto’s load in the allocation of costs. The third is to estimate the costs13
of a resource with characteristics similar to the level of interruptibility proposed for14
Monsanto.15
4.Should the Commission account for the Monsanto revenues, loads, and costs16
on a system-wide basis, an Idaho situs basis or a combination of the two?17
Q.Please explain the available standards for developing a contract rate.18
A.Historically we have used two types of standards to develop interruptible contracts: (a)19
Cost of Service and (b) Contribution to Fixed Costs. As I explain below, the20
contribution to fixed costs standard doesn’t work today for a customer like Monsanto.21
For this reason, PacifiCorp chose to use the cost of service standard. The cost of22
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PacifiCorp
service standard is also the approach recommended by Mr. Schunke of the IPUC staff1
and Mr. Yankel.2
The cost of service standard assumes a monopoly environment in which the customer3
does not have viable alternatives to taking service from the regulated utility. In this4
environment, prices are set based on the utility’s cost of providing service. In Idaho, the5
Commission uses the utility’s embedded costs to ensure that all customers are paying6
their full and fair share of the utility’s costs to provide service. Because Monsanto is an7
interruptible customer, full cost of service is only the starting point. It must be adjusted8
to reflect the cost savings associated with Monsanto’s contractual terms of9
interruptibility. I will discuss the options for these adjustments later.10
The contribution to fixed costs standard is a market or economic efficiency test. It is11
used when a customer has viable alternatives to service from the regulated utility. The12
theory is that if the customer leaves the system and takes service through one of its13
alternatives, remaining customers will be worse off because they will have to make up in14
their rates the contribution the departed customer made to the recovery of fixed costs.15
To avoid this situation, regulatory commissions will often approve a special contract16
with the customer that is priced below embedded cost of service, provided the price17
recovers the utility’s full incremental cost of service and provides a contribution to the18
recovery of fixed costs that would be borne by other customers. This price reduction to19
the contract customer is fair to other customers because they would receive no20
contribution to fixed costs if the customer departed the system. The test, then, is to21
determine whether other customers would be better off (that is, have lower prices) if the22
Taylor, Re - 4
PacifiCorp
utility were to continue to serve the customer at a rate lower than full cost of service1
rather than not serve the customer at all. To benefit other customers, the rate for the2
contract customer must recover the utility’s full incremental cost of providing service to3
the contract customer plus pick up some of the contribution to fixed costs that would4
otherwise be borne by remaining customers. This was the standard that was used to5
support the 1995 Monsanto contract. The service alternatives available to Monsanto at6
that time are described in Monsanto Exhibit 203, the Company’s Technical Assessment7
Package included with its application for approval of the 1995 contract.8
The contribution to fixed costs standard was not used by PacifiCorp in this case9
because the Company’s incremental costs for the term of the contract are expected to10
be higher than embedded costs. Using the contribution to fixed costs standard today11
would drive Monsanto’s prices above the levels proposed in this case. To support the12
prices the Company has proposed, it is necessary to use the embedded cost analysis13
that was used in earlier contracts, before the 1995 contract. Once you switch to the14
embedded cost standard, however, it is inconsistent to compare proposed prices to15
former prices, because of the different pricing standards used. The appropriate16
comparison would be either (a) embedded costs at the time of the former contract (that17
is, 1995) to current embedded costs, or (b) contribution to fixed costs in 1995 to18
contribution to fixed costs today, after first recovering the full incremental costs of19
supplying power. Because the incremental costs of supplying power today exceed the20
rate proposed in this case, Monsanto’s current contribution to fixed costs would be21
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negative. This is why PacifiCorp and the other parties to this case are using an1
embedded cost analysis.2
Mr. Anderson, Ms. Iverson, and Dr. Rosenberg argue that using either the Company’s3
incremental costs or market costs is inappropriate. They claim that because Monsanto4
has been served for over 50 years, it is entitled to a share of embedded costs and as5
long as its price covers embedded variable costs they are making a contribution to fixed6
costs. I agree that Monsanto is entitled to a price based on its share of embedded7
costs; that is why PacifiCorp chose to use the embedded cost standard. What8
Mr. Anderson, Ms. Iverson, and Dr. Rosenberg miss in their arguments is that the basis9
for the contribution to fixed costs standard is incremental costs, not variable costs. As10
used in this context, the term “incremental costs” refers to the additional costs11
PacifiCorp would incur to serve the Monsanto load as opposed to not serving the12
Monsanto load, or the difference between the cost of service without the Monsanto13
load and the cost of service with the Monsanto load. If PacifiCorp serves Monsanto at14
a price lower than its full incremental costs, other customers must pick up the shortfall in15
incremental costs incurred to serve Monsanto. This is not an issue in an embedded cost16
analysis.17
Mr. Smith presents as part of his testimony the Technical Assessment Package18
prepared by the Company in 1995, Monsanto Exhibit 203. There were three19
measurements of contribution to fixed costs in that analysis. One measurement20
compares the proposed Monsanto price against “Net Production Incremental Costs,”21
the next against “Market Alternative Incremental Costs,” and the third against22
Taylor, Re - 6
PacifiCorp
“Surrogate Avoided Resource-Based Incremental Costs.” You will note in each case1
the comparison is against incremental costs. While the Technical Assessment Package2
shows a contribution for the 1995 contract, the world is very much different today.3
PacifiCorp does not have surplus capacity in a sub $20 per MWH market. The4
Company’s cost of incremental resources, our market price forecast, and the recently5
filed Surrogate Avoided Resource Costs are all above the net price proposed for6
service to Monsanto.7
In 1995 Monsanto justified replacing the 1992 contract, which was scheduled to run to8
1997 with prices up to $26 per MWH, because of changes in power markets and the9
Company’s surplus capacity (as Mr. Smith states at page 14 of his testimony, “power10
on the open market was trading as low as $2 per MWH at the same time Monsanto’s11
rates were scheduled to increase”). When it comes time to replace the newer contract,12
however, Monsanto ignores the high prevailing market prices and the fact the13
PacifiCorp is at times capacity deficit.14
Q. Having chosen to use Embedded Cost of Service as the standard, what is the next15
decision point?16
A.The next decision concerns which allocation methodology to employ in calculating17
Monsanto’s embedded cost of service. The Company applied the traditional18
embedded cost of service methodology used before the Idaho Commission since the19
Utah Power/Pacific Power merger, with a few minor modifications as laid out in my20
direct testimony. The Company’s study calculated a cost for firm service to Monsanto21
at $31.40 per MWH. We believe that to be a reasonable, embedded cost based22
Taylor, Re - 7
PacifiCorp
starting point for a contract price with Monsanto. Both Mr. Schunke and Mr. Yankel,1
representing all the intervening parties except Monsanto, agree that both Company’s2
embedded cost of service methodology and the resulting $31.40 per MWH embedded3
cost of service are reasonable for firm service.4
Ms. Iverson, representing Monsanto, proposed several modifications to the Company’s5
methodology. Neither Mr. Schunke nor Mr. Yankel agrees with any of her adjustments6
and I believe they should all be rejected as well. Before I address her adjustments7
individually, I should note that the result of any change in cost allocation methodology is8
not simply a reduction in costs for Monsanto. Any change in cost allocation away from9
Monsanto causes a shift of costs toward residential, small business, agricultural, and10
other large industrial customers. Let me discuss Ms. Iverson’s modifications one at a11
time.12
First, Ms. Iverson proposes a reduction in the target rate of return applied to Monsanto13
because setting the Monsanto price to equal the state ROE without a change in prices14
for other customers raises the state ROE. She suggests that a lower return for15
Monsanto is justified because that is all that is needed to keep the state ROE equal. I16
agree that our proposed price for Monsanto, without a change in prices for other Idaho17
customers, increases the return for Idaho by a small amount. This is because Monsanto18
picks up some of the costs that are assigned on a situs basis to Idaho. As I explain19
below, there are also some cost savings to Idaho associated with assigning the full costs20
of special contracts in other states to those states on a situs basis, which I have done in21
this case. However, I disagree with her adjustment for four reasons:22
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PacifiCorp
1.The Idaho ROE with the higher Monsanto revenue is still lower than a1
reasonable utility return. This increase in revenues will not push PacifiCorp over its2
currently authorized Idaho ROE (which was last set over 15 years ago) or any ROE3
recently approved for PacifiCorp by any other jurisdiction.4
2.Under her proposal the Monsanto return is 6.88 percent, below both the state5
average and a reasonable utility return. This is based on costs from a two-year old test6
period. This shortfall would be locked in over the life of the Monsanto contract,7
resulting in a rate subsidy for Monsanto.8
3.Under Ms. Iverson’s proposal, any benefit associated with situs treatment of9
contracts in other states is passed on to Monsanto rather than to other Idaho customers10
who have been carrying the cost of system wide allocation in the past. These benefits11
should accrue to all Idaho customers, not just Monsanto.12
In previous studies, special contract customers were treated on a system wide basis.13
They were removed from both state jurisdictional results of operations and class cost of14
service studies. No costs were assigned to these customers (that is, the costs to serve15
them were assigned to other customers) and their revenues were treated as revenue16
credits which were allocated to all states and all classes of customers. Any revenue17
shortfall from these contracts was therefore picked up in the rates of retail customers.18
In developing Monsanto’s cost of service in this case all special contracts were assigned19
on a situs basis to the state where the customer takes service. The coincident peak and20
energy data for these customers were included in the allocation of costs to their21
respective home states. Additionally, the revenue from these contracts that was22
Taylor, Re - 9
PacifiCorp
previously allocated across all states was assigned directly to the contract customer’s1
home state. As a result, in the cost of service study done in this case, each state bears2
the full embedded revenue requirement responsibility for all special contract customers3
in that state. The revenue shortfall from these contracts that was previously allocated to4
Idaho has now been reassigned back to the customer’s home jurisdiction. One5
implication of Ms. Iverson’s rate of return adjustment for Monsanto is that it takes6
Idaho’s entire share of that benefit and uses it to lower Monsanto’s contract rate rather7
than flowing it to all Idaho customers.8
4.In the next rate case, when there is an opportunity to change prices for other9
customers, any existing shortfall from the Monsanto contract will either be borne by10
other Idaho customers or absorbed by PacifiCorp. Neither outcome is fair. Plus, any11
revenue requirement change that would have been assigned to Monsanto in the case will12
also be borne by other Idaho customers.13
Her second proposal is to change the classification of Generation and Transmission14
fixed costs from 75 percent demand / 25 prcent energy to 100% demand.15
Mr. Schunke and Mr. Yankel both argue that classification of a potion of the16
Company’s fixed generation and transmission costs as energy related has long been17
accepted by the Idaho Commission. Mr. Schunke supports the Idaho Commission’s18
position on this by stating that base load power plants are built not just to meet peak19
demand, but also to produce low cost energy. He further argues that most recent20
discussions around the classification of fixed generation costs have been to classify a21
larger portion of the costs as energy related. I agree with both Mr. Schunke and22
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PacifiCorp
Mr. Yankel on this issue. In recent Multistate Process (“MSP”) discussions, proposals1
have been made to reclassify as much as 75% of the fixed base-load generation costs2
as energy related.3
Third, Ms. Iverson proposes to use an 8 coincident peak (“CP”) allocation method4
rather than the current 12 CP method. While this adjustment may help Monsanto, it5
hurts Idaho if it is applied on a consistent basis. Because of the concentration of load in6
the summer, the 8 CP allocation method allocates more costs to Idaho than does the 127
CP method. As a result, if an 8 CP method were used for state jurisdictional allocation,8
in the next rate case Idaho would see a larger revenue requirement. Of course, all of9
this would be borne by customers other than Monsanto. Also, if a 12 CP method were10
used for state jurisdictional allocation and an 8 CP method were used for the Monsanto11
contract, costs would be shifted from Monsanto to other Idaho customers. This12
proposed change is inconsistent with the cost allocation method that has been used in13
Idaho and should be rejected.14
Her next proposal is to allocate A&G Expense on the basis of labor rather than plant.15
This adjustment is neither right nor wrong, it is just a different approach than has been16
historically applied. This type of change generally shifts costs from large customers to17
smaller, primarily residential customers.18
Her final recommendation is to shape the allocation of energy costs between high load19
and low load periods. Conceptually this could be a reasonable refinement to the cost20
study. MSP has looked at allocating energy costs hourly rather than annually. The21
impact of such a change for our system, however, appears to minimal. Ms. Iverson’s22
Taylor, Re - 11
PacifiCorp
back of the envelope approach seems to bear that out. The impact of this proposed1
change on Monsanto’s costs is only about 1/3 of 1 percent. I don’t believe this change2
has a large enough impact to warrant additional analysis at this time.3
Q. Having established $31.40 as a reasonable embedded cost basis for firm service, what4
is the next decision point?5
A. The next step is to determine the appropriate credit for the level of interruptibility6
provided by the customer. There have been three general approaches to valuing7
interruptibility presented in this proceeding with some variations of each. One approach8
is to compare the prices, or discounts from standard tariff, for other interruptible9
customers. The next is to include only a portion of Monsanto’s load in the allocation of10
costs. The third is to estimate the costs of a resource with similar characteristics to the11
terms of interruptibility proposed for Monsanto.12
PacifiCorp believes that the third option is the most appropriate. Mr. Watters presents13
a discussion of how PacifiCorp values Monsanto’s interruptibility in the context of the14
Company’s resource needs. In my testimony I review some of the proposals on valuing15
interruptibility presented up to this point in the case. I show that when you make the16
necessary adjustments to match them to Monsanto’s proposed level of interruptibility,17
their range of value compares quite closely with that presented by Mr. Watters.18
Q. What potential resources have been proposed?19
A. There are at least three options: generic single-cycle combustion turbines (CT) from20
RAMPP-6, the recently completed West Valley City CT project, and purchase options21
in the market.22
Taylor, Re - 12
PacifiCorp
Mr. Schunke, Mr. Yankel, and Dr. Rosenberg all use the cost of a simple-cycle1
combustion turbine from RAMPP-6 although they each use the data a bit differently.2
Let me review them one at a time. Mr. Schunke takes the total resource cost of a CT3
at the 15 percent estimated capacity factor ($78.43 per MWH), multiplies it by the4
maximum number of interruptible MWH included in Monsanto’s proposal and spreads5
these costs across Monsanto’s total usage. This yields a $4.34 discount from the firm6
service rate for a net price of around $27 per MWH. I generally agree with7
Mr. Schunke’s analysis; however, I would make one adjustment. He has used the total8
resource cost of the CT. I believe it is more appropriate, as Dr. Rosenberg has done,9
to use only the fixed cost in order to hold other customers neutral to the choice between10
constructing a CT and contracting with Monsanto for interruptibility. Monsanto’s11
interruptibility is not providing any energy or generating revenues associated with the12
production of energy. If the CT were installed and run rather than interrupting13
Monsanto, there would be revenues for those hours of operation that would offset the14
operating costs. The fixed cost of the CT, spread across the estimated hours of15
operations is $55.92 per MWH. This modification changes the interruptibility discount16
to $3.10 and the net price to $28.29, very close to the Company’s proposal. This is17
shown in Exhibit No. 17 (DLT-R1).18
Mr. Yankel uses the cost for different CTs from RAMPP-6 and performs a similar19
analysis. He adjusts the costs for losses, which is reasonable, but unlike Mr. Schunke,20
he applies the resource costs to Monsanto’s total furnace load for all 800 hours. Since21
Monsanto is only proposing to shut down one or two furnaces, this is an overstatement22
Taylor, Re - 13
PacifiCorp
of the resource savings. Adjusting the resource savings in line with the maximum1
potential MWH of interruption and using only the fixed resource cost produces a net2
price in the $28 range. This is shown in Exhibit No. 18 (DLT-R2).3
Dr. Rosenberg uses the fixed resource costs from the same RAMPP-6 CT as4
Mr. Schunke. He adjusts that value for both losses and a 10% reserve margin. While I5
don’t agree that the reserve margin adjustment is warranted, I have not removed it in my6
modifications to Dr. Rosenberg’s calculations. Dr. Rosenberg then applies the resource7
savings to the entire Monsanto load to arrive at a discount of $11.00 per MWH. He8
disregards the fact that Monsanto has agreed to interrupt only part of its load, not the9
entire load. He also disregards that Monsanto proposes to only interrupt that part of10
the load for far less than the 1300 hours that a 15 percent capacity factor would11
require. With those adjustments the resulting discount falls back to the $3.00 range with12
a resulting net price around $28.00 per MWH. This is shown in Exhibit No.19 (DLT-13
R3).14
Another alternative resource to use in this analysis is the recent lease of the West Valley15
Combustion Turbines. Exhibit No. 20 (DLT-R4) shows similar calculations as those16
just shown. The West Valley CT lease has higher fixed costs than the generic RAMPP-17
6 turbine, but it also is expected to operate at a higher capacity factor. Comparing18
Monsanto’s interruptibility against the West Valley lease produces a net price of over19
$29 per MWH.20
Both Mr. Schunke and Mr. Yankel use potential avoided market purchases as another21
alternative value for interruptibility. In his calculations Mr. Schunke uses the value of22
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$33.54 per MWH out of the Company’s recent surrogate avoided cost filing. That1
amount applied to the maximum interrupted MWH yields a net price of $29.50. This is2
probably an understatement of the cost savings during the high load hours when3
Monsanto would be interrupted. Mr. Yankel uses historical high load hour market4
purchases from 2000 and 2001 in his calculations. The wide variations in market5
prices, as shown in his calculations, show the challenge of this method in setting a long-6
term contract price. In addition to the uncertainty of the market prices, two adjustments7
need to be made to Mr. Yankel’s analysis to accurately reflect the interruptibility8
savings. First he assumes 160 MW of interruption for 800 hours. As indicated earlier,9
this in nearly twice the available MWH of interruption proposed by Monsanto. Second,10
he has compressed the hours of interruptibility into a shorter time frame than their11
proposal allows. In Exhibit No. 21 (DLT-R5) I have restated both the quantity of12
available MWH and the distribution of those hours across the months of the year. The13
resulting net price after these changes is between $26 and $28 per MWH.14
Q. You mentioned earlier that another proposed method to calculate the value of15
interruptibility is to remove a portion of Monsanto’s load from the allocation of costs. Is16
this an effective method to value interruptibility?17
A. This method is a usable tool, but I don’t feel it is as effective as the resource valuation18
method just discussed. Ms. Iverson and Dr. Rosenberg have suggested removing 5019
percent of Monsanto’s contribution to system peak from both the jurisdictional20
allocation and the class cost of service study. I disagree with their study for two21
reasons:22
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First, I don’t believe a 50 percent reduction in Monsanto’s share of capacity costs is an1
even exchange for the option to interrupt 2/3 of their load less than 7 percent of the2
hours in a year. The bulk of PacifiCorp’s generation fleet consists of base load, coal3
fired resources that generally run with capacity factors in excess of 80 percent.4
Monsanto proposes a 50 percent reduction in its share of these costs. The simple cycle5
combustion turbines identified from RAMPP-6 have an expected capacity factor of 156
percent. The proposed Monsanto interruptibility is less than 7 percent. Under7
Monsanto’s proposal, other customers would in effect be picking up half the cost of a8
base load resource in exchange for interruptibility rights with less than half the potential9
capacity factor of a peaking turbine. This is not a fair exchange.10
Second, Ms. Iverson removes 50 percent of the entire load Monsanto identifies as non-11
firm (all but 9 MW). However, Monsanto’s proposal never proposes to have their12
entire “non-firm” load interrupted except under the most dire of circumstances. They13
only propose up to two furnaces or 116 MW. If a percentage reduction in contribution14
to system peak is made it should be only for the 116 MW portion that is actually15
available for interruption. I have made that adjustment to our cost of service study and16
the resulting cost of service is $26 to $27 per MWH depending on the reduction in17
MWH sales associated with the interruptions.18
Monsanto’s 50 percent load adjustment also reduces its allocation of transmission19
costs. Historically, while interruptible customers have reduced the Company’s20
generation capacity requirements, the Company has always planned to have adequate21
transmission capacity to deliver their energy requirements. If you apply the load22
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adjustment to generation costs only, leaving the allocation of transmission costs1
unchanged, the cost of service increases by about $1.00 per MWH.2
Q.You indicated that the final decision point is how to allocate the revenues, loads, and3
costs associated with the contract. What are the proposed options?4
A.There are three options:5
1.Assign Monsanto’s load and all the revenue on a situs basis to Idaho;6
2.Assign all costs and revenues associated with Monsanto on a system-wide basis7
with an allocation back to all states as part of the jurisdictional allocation process; or8
3.A hybrid approach where the Monsanto load along with the Commission9
approved firm service revenues are assigned to Idaho and the credit associated with10
interruptibility is allocated system-wide as a power cost expense.11
PacifiCorp believes the third approach is the most appropriate.12
Q. Does the PacifiCorp proposal appropriately capture the system benefits provided by13
Monsanto’s interruptibility?14
A.Yes. The system benefits of the Monsanto contract comes from their interruptibility, not15
from serving their load. I believe PacifiCorp’s proposal appropriately separates the16
transaction into its two essential elements and accounts for each element, the retail sale17
of electricity and the wholesale purchase of power, in the correct manner. The18
Company proposes to book as Idaho retail revenue the sales of electricity to Monsanto19
at the firm service price of $31.40 per MWH and to account for the monthly credit20
associated with the interruptible provisions of the contract as a power purchase. Both21
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the sale and purchase provisions can be separately identified on the same bill with the1
customer paying the net amount.2
The loads associated with Monsanto’s firm service and the associated revenue will be3
included as part of Idaho’s jurisdictional allocation and included in its revenue4
requirement. The purchased power portion of the contract, capturing the system value5
of the interruptibility, will be allocated among all states along with other power costs.6
Q. Several parties in the case argue that assigning the cost of service attributable to7
Monsanto to the Idaho jurisdiction would pose the potential for significant price8
increases for other Idaho customers. Is this correct?9
A. It is not correct if the price for Monsanto’s firm service reflects the full-embedded cost10
of service. If the Idaho Commission orders a price for firm service to Monsanto that is11
lower than what would be supported by the embedded cost of service study – that is, if12
there is a cost of service subsidy in favor of Monsanto – then other Idaho customers13
could be required to bear the cost of that subsidy. I agree with Mr. Schunke when he14
states “if rates are set at full cost of service, including a reasonable discount for15
interruptibility, there is no subsidy.” In such a case, as has been proposed by the16
Company, other Idaho customers would not be harmed by including Monsanto as part17
of the Idaho jurisdiction.18
If, for local economic reasons, the Idaho Commission should decide that a discount19
greater than the system value of interruptibility is warranted, the Company’s proposal20
gives them that option. Because those economic benefits accrue to Idaho and not to21
other states, the additional discount should be included as part of Idaho retail revenues.22
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Q. Mr. Smith takes exception with PacifiCorp’s characterization of Monsanto’s current1
price as $23 per MWH. He states that the 1995 contract clearly states that the2
$30 million payment at the beginning of the contract was a buyout of the old contract3
and that their current actual and effective rate is $18.50 per MWH. He further states4
that PacifiCorp is requesting a 70 percent rate increase from Monsanto. Do you agree5
with his characterizations?6
A. No. While I agree that the 1995 contract identified the $30 million as a buyout of the7
old contract, all parties in the case recognized that the only reason for the $18.50 price8
was because of the prepayment. Monsanto’s own attorney argued in the contract9
approval case that the $30 million prepayment made the effective price in excess of $2310
over the life of the contract. In support of the 1995 contract Mr. Racine stated:11
“Amortizing the $30 million payment at the prime interest rate of 8.75%12
over the life of the Agreement, the average Monsanto rate, including the13
1.85 cents / kWh energy charge, would be in excess of 2.3 cents /14
kWh.”15
16
Amortizing the $30 million over the remaining live of the old contract would have17
resulted in an effective price of over $32, greatly in excess of the contract rates18
scheduled for 1996 and 1997.19
The error in Mr. Smith’s argument is that he completely ignores the $30 million20
payment, allocating it to neither the 1992 contract nor the 1995 contract. The payment21
was made, and it must be allocated to one contract or the other.22
Certainly the Company’s proposed increase is not 70%. The net price including23
interruptibility is approximately $27 per MWH. An increase from $23 to $27 is only24
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17.4 percent over 6 years or less than 3 percent a year. If the $30 million is allocated1
to the 1992 contract, the price including interruptibility actually decreases from $32 per2
MWH to $27 per MWH.3
Q. Is the 1995 contract the proper base line for comparing the price and terms of a new4
contract for Monsanto?5
A. No. The Monsanto witnesses consistently refer back to the 1995 contract as the basis6
of comparison for the proposed new contract. Such a comparison is misleading, both in7
terms of price and in terms of interruptibility. A comparison to the 1992 and other8
previous contracts puts the proposed contract in an appropriate context. The 19959
contract was developed under unique circumstances that did not exist when the pre-10
1995 contacts were approved and do not exist today. As noted by Mr. Smith is his11
testimony, the 1992 contract, which was scheduled to run to 1997 with prices12
increasing to $26 per MWH, was terminated early because of changes in power13
markets and the Company’s surplus capacity. In 1995 PacifiCorp had excess capacity,14
power was trading in the wholesale market at prices below $20 per MWH, direct15
access appeared imminent in much of our service territory, and Monsanto had viable16
alternatives to service from PacifiCorp. None of those conditions existed at the time of17
the pre-1995 contracts and they do not exist today.18
Q. How does the Company’s proposal match up when compared to the 1992 contract?19
A.When compared to the 1992 contract, the net price change proposed by the Company20
is a very modest increase. An increase from $26 (the end price of the 1992 contract)21
to $27 is less than 4% over 4½ years. If you look at the history of the Monsanto22
Taylor, Re - 20
PacifiCorp
contract over time, you will see that the Company’s current proposal compares very1
favorably with past contracts. This price trend is illustrated in the graph contained in2
Exhibit No.22 (DLT-R6).3
Q.Does this conclude your rebuttal testimony?4
A.Yes it does.5