20100528Crane Direct.pdf

2810 MAY 28 PH 12: 01
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UTiUi k::
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE )
APPLICATION OF ROCKY )
MOUNTAIN POWER FOR )
APPROVAL OF CHANGES TO ITS )
ELECTRIC SERVICE SCHEDULES )
AND A PRICE INCREASE OF $27.7 )
MILLION, OR APPROXIMATELY )13.7 PERCENT )
CASE NO. PAC-E-I0-07
Direct Testimony of Cindy A. Crane
Redacted
ROCKY MOUNTAIN POWER
CASE NO. PAC-E-I0-07
May 2010
1 Q.Please state your name, business addres and present position with PacifCorp
2 ("Company").
3 A.My name is Cindy A. Crane. My business address is 1407 West Nort Temple, Suite
4 310, Salt Lake City, Utah 84116. My position is Vice President, Inteiwest Mining
5 Company and Fuel Resources for PacifiCorp Energy.
6 Qualifications
7 Q.
8 A.
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Briefly describe your busines experience.
I joined PacifiCorp in 1990 and have held positions of increasing responsibilty,
including Director of Business Systems Integration, Managing Drrector of Business
Planning and Strategic Analysis and Vice President of Strategy and Division
Services. My responsibilties have included the management and development of
PacifiCorp's ten-year business plan, assessing individual business strategies for
PacifiCorp Energy, managing the construction of the Company's Wyomig wind
plants and assessing the feasibilty of a nuclear power plant. In March 2009, I was
appointed to my present position as Vice President of Interwest Mining Company and
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Fuel Resources. In my position, I am responsible for the operations of Energy West
Mining Company and Bridger Coal Company ("BCC") as well as overall coal supply
acquisition and fuel management for PacifiCorp's coal plants.
19 Purpose and Summary
20 Q.What is the purpose of your testimony?
21 A.I explain the Company's overall approach to providing the coal supply for the
22 Company's coal plants.
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Crane, Di - 1.
Rocky Mountain Power
1 Q.
2 A.
Please summarize your testimony.
My testimony:
3 . Explains the coal cost increases reflected in the fiing and describes the primar
4 reasons for the increases;
5 . Provides background on the thir-pary coal contract revisions that are drving
6 increases in coal costs in this case;
7 . Reviews the increase in the Company's affiliate mine coal costs and compares
8 them to other supply alternatives; and
9 . Demonstrates that customers benefit from the Company's diversified coal supply
10 strategy.
11 Overview of the Coal Supplies for the Company's Coal Plants
12 Q.
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How does the Company plan to meet fuel supplies for its coal plants in 2010?
The Company employs a diversified coal supply strategy. For 2010, the Company
wil meet approximately 71 percent of its fuel requirements from third pary, multi-
year contracts and the remaining 29 percent wil be supplied with coal from the
Company's affiliate mines.
What percentage of the Company's third party purchase coal contracts are fixed
and what percentage are indexed?
The percentage split is roughly SO/50. For 2010, approximately 37 percent of the
Company's thtrd pary purchase coal supply wil be priced under fixed-price contracts
and 34 percent wil be priced under contracts that escalate/de-escalate based on
changes to producer and consumer price indices.
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Crane, Di - 2
Rocky Mountain Power
1 Q.
2 A.
Please identify the affdiate mines which supply Company coal plants.
Coal production from the Company's Bridger mine is dedicated to the Jim Bridger
3 plant. Energy West's Deer Creek mie supplies a portion of the coal requirements for
4 the Carbon, Hunter and Huntington plants and the Trapper mine is dedicated to the
5 Craig plant.
6 Coal Cost Increases in 2010
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Do coal costs in the 2010 GRC reflect an increase from 2oo8?
Yes. On a system wide basis, the price related increase is approximately $104
milion. The Company's coal costs have increased from an average of $23.84 per ton
in 2008 to an average cost of $27.95 per ton in 2010, an increase of $4.11 per ton
over the two-year period. This reflects increases in purchased coal under both fixed
and escalating contracts and increases in costs at the affiliate mines. These coal costs
are an input in the Company's GRID model used to produce normalized net power
costs as described in Dr. Hui Shu's testimony.
What are the primary factors causing this increase in coal costs?
Overall, there are five primary factors contrbuting to the cost increase:
. Execution of a new coal supply and rail agreements for coal deliveries
from the Black Butte Mine for the Bridger Plant;
. Higher operating costs at BCC;
. A price increase pursuant to a contract price reopener provision with
Chevron Mining for the supply of coal from the Kemmerer Mine to the
Naughton Plant;
. Fixed contract price escalation under the coal supply agreements with
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Crane, Di - 3
Rocky Mountain Power
1 Arch CoalS ales for the Utah Plants; and
2 . Higher operating costs at the Deer Creek mine.
3 Coal Costs Related to the Bridger Plant
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Please desribe the new coal supply agreement with the Black Butte Mine for the
Bridger Plant.
The Company obtains approximately a third of the coal necessar to fuel the Bridger
Plant from Kiewit Mining's Black Butte Mine. This coal comes from a mine simiar
to the Bridger surface mine in design and geology. The new agreement replaces an
existing agreement that expired in December 2009. The 2010 weighted average
Black Butte mine price of _ per ton is approximately. percent higher than the
2008 coal price of _ per ton. Included in the 2010 price is carover. tonnage
from the prior contract. Absent the carover tonnage, the 2010 coal price would be
_ per ton, over. percent higher than the 2008 Black Butte coal price.
How do the rail transporttion costs for Black Butte deliveries compare to 2008?
Transporttion costs have increased similarly to the coal price. Transporttioncosts
have increased from" per ton in 2008 to" per ton in 2010, an increase of
approximately. percent.
What is the overall impact of the new Black Butte coal supply and ran
agreements in 2010?
Approximately. millon of the overall cost increase between 2008 and 2010 is
associated with deliveries of Black Butte coal to the Bridger Plant.
How has the Bridgermine changed in recent years?
BCC is now an integrated mine complex with both surace and underground mining.
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Crane, Di - 4
Rocky Mountain Power
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For many years, BCC was able to extract coal at the surace mine though its dragline
operations and low-cost highwal mining. Now, the surace operation is the swing
coal supply for the Bridger Plant. The majority of the Bridger Plant requirments are
supplied by BCC underground operation. With the underground mie operating at
full production capacity, the surace operation provides the operational flexibilty and
capacity necessar to assure a reliable and continuous fuel source for the Plant.
Are the BCC surface and underground separate operations?
No. Both operations share common assets such as conveyors, scrapers, dozers, light
duty vehicles, mantenance shops, administrative buildings, etc. Mine admnistration
personnel including purchasing, planning, engineering, environmental services,
information technology, safety, human resources, administration services,
government relations and surveying support both operations.
Please explain blending of surface and underground coals at the Bridger mine?
The surace operation provides the operational flexibilty and reliabilty for the
Bridger Plant. All coal, surface and underground, has an assigned coal quality. Mine
plans are developed on a monthly basis to ensure that the delivered coal product to
the Bridger Plant meets specific coal quality criteria. On a daily basis, surace
operation and deliveries are adjusted to meet specification. Blending is critical since
the underground operations are limited to a single coal seam. Without the surface
operation, BCC could not deliver a product that could meet the Jim Bridger Plant's
quality targets.
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Crane, Di - 5
Rocky Mountain Power
1 Q.
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Please provide an overview of cost increases at the Bridger Mine reflected in this
filing.
Bridger Mine costs are increasing from _ per ton in 2008 to _ per ton. in
2010 or, an overall increase of. millon. The overall increase in 2010 costs
reflects higher production taxes as well as increases in royalties, depreciation and
amortization expense. Additionally, in 2008, almost half of the surace coal was
produced utilizing low-cost highwall mining. Highwall mining has ceased at the
mine because those areas of the surace pits suitable for highwall mining have now
been depleted.
Please compare Bridger mine costs relative to other supply options.
Bridger mine costs remain considerably less than any available market alternative.
Though Kiewit Mining has _ tons of uncommtted Black Butte production
capacity through 2014, this amount is insufficient to replace the coal supply from the
Bridger mine. In any event, the delivered cost of this uncommtted tonnage to the Jim
Bridger Plant is approximately. per ton in 2010, almost. per ton higher than
BCC costs in the test period. The projected delivered cost of Powder River Basin
("PRB") coal in 2010 is over. per ton, . per ton higher than BCC costs in the test
18 period without even considering the costs of capital modifications required for the
19 Bridger Plant to bur PRB coals.
20 Naughton Plant Coal Prce Increase
21 Q.
22 A.
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Please describe the price reopener related to the Naughton contract.
The Company's long'-term coal supply agreement with Chevron Mining's Kemmerer
mine extends though 2016 and contains several price re-openers. The next price re~
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Crane, Di - 6
Rocky Mountain Power
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opener was scheduled to occur on January 1,2011. However, due to_
, Chevron Mining requested that the Company advance the price re-
opener date to Januar 1,2010. The Company agreed to advance the re-opener date
provided there is an overall cost reduction over the remaining term.
Has the Company evaluated supply alternatives for the Naughton Plant?
Yes. The Company has evaluated alternative supplies.
Including transportation costs, the
Company estimates the average cost to replace the coal supplied by the Kemmerer
Mine would be in excess of. per ton.
Please explain what price is reflected in the 2010 GRC for the Naughton Plant
After months of negotiations, the paries have conceptually agreed to a new contract
price of_ per ton, with an effective date of Januar 1,2010. While this price
represents an increase of. per ton over the 2008 test period costs or. millon
on a system-wide basis, the new contract price would provide significant savings for
Company ratepayers through the remainder of the current term relative to the
Company's other supply options. Additionally, the agreement would allow the
Company to extend the coal supply with Chevron Mining for the Naughton Plant
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Crane, Di-7
Rocky Mountain Power
1 though 2021.
2 Coal Costs Related to the Utah Plants
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How do coal costs for the Utah plants compare to 2oo8?
Coal prices for the Utah plants are projected to increase by approximately. millon
due to increases iiicosts under the Company's coal supply agreements with Arch
CoalSales as well as increased Deer Creek mine production costs.
Please describe the increase under the long-term agreement with Arch.
The Company has three multi-year coal supply agreements with Arch CoalS ales
Company. In 1998, the Company entered into a long-term coal supply agreement
with Arch for up to 4.5 millon tons of primarly Sufco mine coal though 2020. This
contract supplies the majority of the fueling requirements for the Utah coal plants. A
2007 price reopener established fixed annual price increases for 2008,2009 and 2010.
The price of coal has increased by .. per ton between 2008 and 2010 or.
milion. Additionally, the Company entered into thee-year supply agreements with
Arch for Dugout and Skyline coals as part of the Electrc Lake settlement. These
agreements provide for a fixed price increase of. per ton between 2008 and
2010 or. millon.
What is the overall cost increase under the coal supply agreements with Arch
CoalSales Company?
Approxiately. millon of the overall price increase for the Uta plants is tied to
fixed price increases under the Arch agreements.
Please explain the increases in Deer Creek Mine costs between 2008 and 2010.
The Deer Creek Mine is located in Utah. Deer Creek Mine costs are projected to
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Crane, Di - 8
Rocky Mountain Power
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increase to _ per ton from the 2008 price of _ per ton, an increase of
approximately. millon. While labor costs and major overhaul expense have
increased since 2010, a reduction in longwall production during the last half of 2010
is the principal driver of the cost increase.
Please explain why longwall production is reduced in 2010?
The curent longwall system was purchase and placed in service in August 1998
with an expected ten-year life. The longwall system is being reconstructed during the
last half of 2010 while the mine transitions from the upper Blind Canyon seam to the
lower Hiawatha seam. Based on a risk assessment of the existing longwall equipment
by Joy Mining, the longwall system rebuild is necessar to facilitate the recovery of
the remaining longwall reserves in the Deer Creek mie. To maximize mine
production, the rebuild is scheduled to coincide with the lengthy move to the lower
coal seam.
How do Deer Creek Mine costs compare to Utah market alternatives?
Even with the cost increase in 2010, the Deer Creek mine is considerably less
expensive than any market alternative and remains the least-cost supply for the Utah
plants. Deer Creek Mine costs are considerably less than our market alternatives.
According to Argus Coal Daily, spot prices for Utah coal have ranged from. per
ton to. per ton during 2010. Similarly, Platts' Coal Outlook reflects Utah spot
coal prices hovering near. per ton. Based on discussions with other coal
producers, Deer Creek-equivalent quality coal is being transacted for approximately
$50 per ton for a multi-year arrangement.
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Crane, Di - 9
Rocky Mountain Power
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Please summarize the benefits of the Compay's coal supply strategy to Idaho
customers.
The Company has pursued a diversified coal supply strategy, relying on fixed
contracts, indexed contracts and affiliate-owned coal mines to meet the fuel needs of
its coal plants. This strategy has resulted in a long-term, stable and low-cost supply
of coaL. In paricular, the operating cost for each of the affiliate mines remains
considerably less than market alternatives. While mine production costs wil
typically fluctuate more than contract prices in a given year, the Company's affiiate
mines are superior to other supply options and consistently provide benefits to
customers.
Does this conclude your direct testimony?
Yes.
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Crane, Di - 10
Rocky Mountain Power