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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 Taylor, Re - 2 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 Taylor, Re - 3 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 Taylor, Re - 5 PacifiCorp 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 Taylor, Re - 8 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 Taylor, Re - 10 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 Taylor, Re - 14 PacifiCorp $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 Taylor, Re - 15 PacifiCorp 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 Taylor, Re - 16 PacifiCorp 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 Taylor, Re - 17 PacifiCorp 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 Taylor, Re - 18 PacifiCorp 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 Taylor, Re - 19 PacifiCorp 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