20061103Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BARNO. 1895
RECEIVED
200& NOV - 3 Pt-1 3:
IDAHO i:JUi3LiC .
UTILItiES COMMISSIOI'-J
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
PACIFICORP DBA ROCKY MOUNTAIN
POWER FOR APPROVAL OF AN ELECTRIC
SERVICE AGREEMENT WITH MONSANTOCOMPANY.
CASE NO. P AC-O6-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Modified Procedure, Notice of Scheduling and Notice of Hearing issued on August 21 2006
submits the following comments.
BACKGROUND
Pursuant to Commission approved Stipulation in PacifiCorp s 2005 rate case (PAC-05-
Order No. 29833) PacifiCorp agreed to file a general rate case no later than April 29, 2006 to
address cost of service issues not resolved in the 2005 Stipulation and to time the effective date of
new rates to coincide with the expiration of the current Monsanto contract (December 31 2006).
The Company s 2006 filing was delayed to permit Company contract negotiations to proceed with
Monsanto. The Company s filings in Case Nos. PAC-06-4 (Rate increase - Schedules 10 400
STAFF COMMENTS NOVEMBER 3, 2006
401),06-8 (Nu-West Stipulation) and 06-9 (Monsanto Service Agreement) are intended to satisfy
its 2005 Stipulation filing commitment.
Application
PacifiCorp in Case No. P AC- E-06-9 presents for Commission approval a May 18 , 2006
Electric Service Agreement (Agreement) with Monsanto Company. The Company requests
approval of the related Tariff Schedule 400 rate adjustment in Case No. PAC-06-
Monsanto operates an elemental phosphorous plant near the city of Soda Springs in Caribou
County, Idaho. The existing contract governing electric service to Monsanto terminates December
2006. The submitted Agreement is a three-year contract that will become effective January 1
2007.
Rates for service under the Agreement will be adjusted to equal the Commission approved
rates applicable to Monsanto resulting from any general rate case or other filing by PacifiCorp
effective after January 1 , 2008. Commission authorized tariff rate changes after January 1 2008
including surcharges or credits, as reflected in Schedule No. 400 or its successor, will apply to
service under the Agreement on the effective date of the authorized adjustment.
STAFF ANALYSIS
Revenue Requirement Analysis
Staff audited the Results of Operations (Larsen Testimony, Exhibit 1) for a test year ending
September 30 2005. During the course ofthe audit, Staff determined that there should be
adjustments to the Results of Operations for reductions in the return on equity, reductions in capital
projects that should not be included in rate base and for reductions in annual expenses. Staff
believed it necessary to make these adjustments to the Results of Operations in order to evaluate the
reasonableness of the Company s combined revenue requirement proposal made in the three filings.
These adjustments and resulting revenue requirement will be considered preliminary for future rate
cases where other adjustments may be made. Staff s adjustments reduce the revenue requirement
for Idaho by approximately $5.0 million. The Staff Audit Report is provided as Attachment A
Staff Audit Report, Staff Comments/Case No. P AC-06-
The Idaho revenue requirement including Staffs adjustments was compared to the revenues
the Company is currently collecting plus the $8.25 million in increases it is asking for in the three
cases. The revenue that the Company would be able to collect with the increases requested in these
STAFF COMMENTS NOVEMBER 3, 2006
three cases is less that the adjusted revenue requirement Staff determined through its audit.
Therefore, from a revenue requirement increase perspective, the requested increases in the
Applications are reasonable.
Foundation of the Agreement
Based on the results of the cost of service study submitted as Company Exhibit No.2 in
Case No. P AC-06-, Monsanto revenue requirement under the Agreement is increased by $6.
million, or 16.5%. The proposed increase continues the principal of cost based service by moving
Monsanto more than halfway toward full cost of service as specified in the study. Staffs analysis
of the revenue requirement and cost of service study is detailed in Case No. P AC-06-
At the same time, the new Agreement provides valuable products and services to the
PacifiCorp system in the form of interruption for economic and reliability purposes. Revenue paid
under the contract to Monsanto for these interruptible services help to offset the increased costs
incurred by Monsanto to receive electrical service.
The Agreement represents the first contract between Monsanto and the Company that would
be considered a Tariff Standard, rather than a Contract Standard. A tariff standard contract is
subject to general rate changes approved by the Commission during the term of the Agreement.
It will therefore provide a closer link going forward between the contract rates and cost of
service. As explained in Section 2.2 of the Agreement, adjustments may be made to, but not
limited to, the customer charges, demand charges, energy charges, as well as the credit value. Staff
supports the language in the Agreement as being equitable to both parties. Not only will the
Company be able to collect revenues from Monsanto based on its cost of service, but the price paid
to Monsanto will reflect the value of the products it provides the Company. Both the Company and
Monsanto have assured Staff that there are opportunities for either side to reevaluate the credits in
the context of a general rate case. Staff believes it is important for Monsanto to have an
opportunity to reevaluate the value of the credits at the same time rates are changed to reflect
changes in cost of service. This ability will help keep rates affordable for Monsanto and reduce the
need to argue cost of service in a general rate case. The language in Tariff Schedule 400 has been
revised to accommodate the nature of the Monsanto Agreement, in that a specific dollar amount for
the Interruptible Demand Charge is replaced with "Firm Demand Charge minus Interruptible
Credit" (Exhibit Accompanying Direct Testimony of Jeffrey K. Larsen).
STAFF COMMENTS NOVEMBER 3 , 2006
Contract Terms
Under the Agreement, Monsanto will incur separate charges for firm power and energy with
assured availability and delivery, and interruptible power and energy subject to delivery provisions
specified in the Agreement. Firm Power and Energy is defined as the first 9 000 kW of Demand
and the associated energy provided to Monsanto during the monthly billing period. For each billing
period, Monsanto will be assessed a Firm Demand Charge, a Firm Energy Charge and a Firm
Customer Charge as shown in the table below (Agreement, Section 4.1.1). The 9 000 kW of Firm
Power represents roughly 4% of Monsanto s Total Contract Demand of215 000 kW, an amount of
energy the Company agrees to have available to serve Monsanto. The rates reflect a nominal
increase of roughly 19%,13., and 253% for the Firm Energy Charge, Firm Demand Charge and
Customer Charge, respectively. These Tariff Schedule 400 changes generate the revenue
requirement when anticipated annual billing determinates in the 2005 cost of service study for
Monsanto are applied.
Interruptible Power and Energy is defined in the Agreement as the difference between the
measured demand for the billing period and the Firm Demand outlined above, and the associated
energy delivered during the billing period. It should be noted that this is not the difference between
the Total Contract Demand and Firm Demand, but rather it is based on actual billed usage. In
return for providing the Company with interruptible and curtailment options, Monsanto will receive
a credit to its Demand Charge for interruptible power (Agreement, Section 4.1.2). The value of the
interruptible credit is reflected in the valuation of the products described below. The Interruptible
Energy charge is the same as the Firm Energy charge, 19.40 mills per kilowatt-hour during the
billing period. The following is a summary of the Revised Tariff Schedule 400 rates:
STAFF COMMENTS NOVEMBER 3, 2006
EXISTING AND PROPOSED REVISIONS TO TARIFF SCHEDULE 400
Monthly Charges Existing Proposed in Stipulation
Firm Energy 16.31 mills/kWh 19.40 mills/kWh
Firm Demand $8.81 per kW $10.00 per kW
Customer Charge $283 per Billing Period $1000 per Billing Period
Interruptible Energy 16.31 mills/kWh 19.40 mills/kWh
Interruptible Demand $4.09 per kW CONFIDENTIAL
Valuation of Credits
The Agreement sets the terms of electrical service provided by the Company and the
interruptible products offered by Monsanto for a three-year period starting on January 1 , 2007.
Staff has evaluated the methodology used to derive values associated with the interruptible products
and compared the methodology to that used in the current contract, which is set to expire at the end
of 2006. The methods used to value the interruptible services are based on the cost the Company
otherwise would have incurred to obtain the similar services in the absence of the Monsanto
contract.
The determination of the interruptible credit is predicated on three distinct interruptible
products offered by Monsanto. Under the Agreement, the Company may curtail service to
Monsanto 1) to meet operating reserve requirements, 2) during periods where it is economically
beneficial to the Company and its ratepayers to do so, and 3) to maintain the Company s system
integrity in case of a double contingency event. The Agreement stipulates the maximum amount of
hours associated with each product that the Company has available during the calendar year as well
as the required notification time and buy-through options for Monsanto.
The operating reserve product provides the Company with the ability to curtail a portion of
service to Monsanto in order to maintain compliance with WECC standards ensuring reliable
operation of the interconnected electrical system, and is therefore considered part of the Company
non-spinning reserves. The amount of operating reserve curtailment available to the Company is
dependent upon the given operations at the time when the Company contacts Monsanto. The
proposed Agreement states that interruption periods are for the duration of one hour, may not
exceed four consecutive hours, and is limited to twenty-five interruptions per month and no more
STAFF COMMENTS NOVEMBER 3, 2006
than 188 hours per calendar year (Agreement, Exhibit ", Section 5.1). The current contract has
an upper bound on operating reserve interruptions of288 hours per calendar year. The proposed
Agreement reflects the fact that the Company has not required such an amount of curtailment in the
past, such as in 2005 when only 100 hours of operating reserve curtailment was called upon.
The Company values the operating reserve product based on the opportunity cost of holding
an economically viable plant offline in order to meet operating reserve requirements. This
methodology also takes into account the benefits of not having to set aside transmission from its
hydro units in the West should the reserves be needed. Staff believes that the Company s valuation
methodology for the operating reserves product is reasonable and the service provides significant
benefit to the PacifiCorp system. As with the system integrity product, Monsanto provides a level
of insurance and flexibility for the Company to operate under WECC guidelines. The Company has
clarified that the short-term portion of the price curve (less than six years) is based on actual market
quotes that the Company faces that are updated daily, and are not reliant on an internally derived
price forecast.
The economic curtailment product is designed to allow the Company to curtail the load on
Monsanto s largest furnace with no less than two hours notice from the Company. This option
reduces the Company s power supply costs by freeing up the energy associated with the furnace for
sale on the market. The upper bound for economic curtailment is 800 hours per calendar year, an
increase of300 hours over the current contract (Agreement, Exhibit ", Section 2.1). Using its
forward price curve, the Company values the economic curtailment product as the market value of
the energy during the 800 most expensive hours of the year. Monsanto has the option to buy-
through the economic curtailment for replacement energy at an appropriate index price adjusted by
a mutually agreed upon hourly shaping factor, representing the Company s system demands over
the course of a day (Exhibit "1 "). Both the valuation methodology and buy-through option for
economic curtailment received much scrutiny during the last electric service agreement case
between Monsanto and the Company (Case No. P AC-01-16). The Commission rejected both the
Company s use of the Black-Scholes model for options valuing and Monsanto s avoided peaking
resource methodology for the credit (Order No. 29157). Staff finds that the methods used in this
Agreement are less complicated, provide Monsanto with a fair and reasonable buy-through price
and more accurately reflects the value of this service to the PacifiCorp system. The Agreement
facilitates adjustment of the hourly shaping factors upon review and mutual agreement between the
STAFF COMMENTS NOVEMBER 3 , 2006
Parties, and supports the conventional wisdom that there is value for hours beyond the maximum
500 hours of curtailment in the current contract. This last point directly relates to the use of the
Black-Scholes model from Case No. PAC-01-, where the Company derived minimal, if any,
value for economic curtailment above 500 hours per year. Since that case, the Company has
utilized the maximum amount of economic curtailment each of the past three years, seemingly
debunking the results from the Company s Black-Scholes model.
The final interruptible component of the Agreement is the system integrity product. System
integrity interruptions can occur in order to maintain prudent reliability and voltage levels, or in the
case of a double contingency event (when there is a forced outage of at least two Company
generating units totaling 500 MW of capacity or greater within 48 hours of each other that overlap
for at least an hour). The Company may curtail 162 MW of Monsanto s load in the case of a
voltage related incident, and 95 MW for double contingency events. Similar to the current contract
system integrity interruptions are capped at twelve hours per year, but may last longer than an hour
in duration. The Company benefit for system integrity interruptions resides in avoiding having to
expose its ratepayers to market prices to meet its load needs. The Company s methodology for the
system integrity product uses the annual average high load hour (HLH) price as a basis for
valuation. Staff finds this to be a reasonable method as the probability of a system outage event is
relatively equal across all hours of the year.
CONCLUSIONS AND RECOMMENDATIONS
The Agreement supports Staffs position that Monsanto contract revenue paid to PacifiCorp
should reasonably reflect cost of service. Staff also believes that the move to a tariff standard
contract will provide a closer link between revenue and cost of service going forward and is
appropriate.
Staff notes that the methods utilized to value the interruptibility credits reflect an
improvement over the methods proposed in Case No. PAC-01-16. Furthermore, Staff recognizes
the value to Monsanto, Idaho ratepayers and the PacifiCorp system of periodic reevaluation of
interruptible services and values in conjunction with Idaho general rate cases. Finally, Staff
believes that the rates and charges were reasonably negotiated to produce a cost based revenue
requirement and equitably meet the needs of both parties. Therefore, Staff recommends that the
Commission approve the proposed Agreement between PacifiCorp and Monsanto.
STAFF COMMENTS NOVEMBER 3 , 2006
Respectfully submitted this
Technical Staff: Dave Schunke
Bryan Lanspery
Joe Leckie
i: umisc: commen ts/paceO6 .4swj lb 1. doc
STAFF COMMENTS
f) day of November 2006.
Scott Woodbury
Deputy Attorney General
NOVEMBER 3, 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 3RD DAY OF NOVEMBER 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. PAC-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BRIAN DICKMAN
DEAN BROCKBANK
ACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2200
SALT LAKE CITY UT 84111
RANDALL C BUDGE
RACINE OLSON NYE ET AL
PO BOX 1391
POCATELLO ID 83204
DATA REQUEST RESPONSE CENTER
ACIFICORP
825 NE MUL TNOMAH STE 800
PORTLAND OR 97232
14-ASECRETARY
CERTIFICATE OF SERVICE