20101116Walje Reb.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF ROCKY
MOUNTAIN POWER FOR
APPROVAL OF CHANGES TO ITS
ELECTRC SERVICE SCHEDULES
AND A PRICE INCREASE OF $27.7
MILLION, OR APPROXIMATELY
13.7 PERCENT
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) CASE NO. PAC-E-I0-07
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) Rebuttal Testimony of A. Richad Walje
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ROCKY MOUNTAIN POWER
CASE NO. PAC-E-I0-07
November 2010
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Please state your name, business addres and present position with
PacifiCorp dba Rocky Mountain Power ("Company").
My name is A. Richard Walje. My business address is 201 South Main, Suite
2300, Stit Lake City, Utah 84111. I am the President of Rocky Mounta Power
(or "Company").
Are you the same A. Richard Walje that submitted direct testimony in this
proceeding?
Yes.
What is the purpose of your testimony?
The purose of my testimony is to provide a summar of the Company's rebutt
position for the 2010 Idaho general rate case ("Application"), address certain
policy issues raised by intervening paries and the implications those issues would
have to the Company if implemented, and finally, I wil provide an introduction
of the Company witnesses rebutting the intervening pares positions in this case.
Specifically, I wil address in more detail the following issues:
. A sumar of the Company's rebutta position;
. Overview of pares positions;
. The Company's efforts to control costs while maitang reliable service and
customer satisfaction; and
. Monsanto's service.
Walje, Di-Reb - 1
Rocky Mounta Power
1 Summary
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What is the revised revenue increase the Company is requesting in this
Application?
The Company's rebutt position is $24.9 millon or a 12.3 percent average
increase over Rocky Mountain Power's current rates. Ths is a reduction of $2.8
milion from the Company's original request. On May 28, 2010, the Company
fied its Application with this Commssion requesting a revenue increase in the
amount of $27.7 millon, or a 13.7 percent average increase over Rocky Mountain
Power's curent rates. The single largest reduction to the Company's original
Application was the inclusion of bonus depreciation, which reduces the original
request approximately $1.8 millon. When the Company fied this Application it
was not certn whether Congress would extend bonus depreciation though 2010.
Since the Application was filed legislation passed that did extend bonus
depreciation and the Company has reflected that in its rebuttal fiing.
Did any of the partes to this cae raise this issue?
No. However, one of the Company's core priciples is regulatory integrity, and
with the extension of ths law the Company wil receive tax benefits on the new
capita investment that we are obligated to pass on to our customers. As a
regulated utility it is our obligation to our customer to control costs in every way
we can and to contiually identify cost reduction opportnities such as this ta
benefit. Although the percentage increase reuested in ths rate case is
significant, the Company has made extrordiar efforts to control its costs. It is
wortwhie notig that percentage increases do appear large when applied to rates
Walje, Di-Reb - 2
Rocky Mounta Power
1 that are very low.
2 Q.Why is the company seeking .a rate increae in a diffcult economy?
3 A.We do not take lightly this request to raise customer's rates; however, it is critical
4 that rates reflect the curent actual costs of serving our customers. With the
5 statutory obligation to serve, utilties must make investments regardless of the
6 economy. And, these investments are years in planning and execution, meanig
7 that the investments often star in strong economic times but ar completed when
8 the economy is not as robust. This same pattern has occured before, such as in
9 the late 1970s and early 1980s.
10 Absent the increase requested in this case, the Company wil be denied
11 the prudent costs of providing service and an opportnity to ear a reasonable
12 retu on those investments. That would violate the most basic of regulated
13 ratemakng principles. It is important to emphasize that these are investments the
14 Company has aleady made to serve our customers. Our abilty to provide safe,
15 reliable service to our customers is dependent on the revenues we receive from
16 them.
17 Overview of Rebutta Positions
18 Q.What is your response to the overall position of the paries to this case?
19 A.Quite honestly, disappointment. As I noted in my diect testimony, the
20 Company's curent rates are base on rate base balances as of December 31,
21 2007. Since 2007 the Company has invested over $4 bilion of capita in
22 absolutely necessar new plant investment, and net power costs have increase by
23 $87 millon to serve our customers. In order to keep our customers' lights on, we
Walje, Di-Reb - 3
Rocky Mountan Power
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have to generate or procure electrc energy, and the Company deserves the abilty
to recover the costs of providing that service. Despite these facts, and the basic
faiess of customers paying for what they use, the cumulative recommendations
of the other paries would have the Commssion reduce our revenue requirement
by approximately $17 millon. As the Company's witnesses have indisputably
demonstrated and wil continue to demonstrate, the investments and cost increases
in this case were necessar and prudent to serve customers now and in the futue.
If these costs are.already incurred how can there be a $45 millon difference
between the Company's position and the intervening parties' cumulative
position?
Some parties argue that $800 millon of prudently incured costs for the Populus
to Termnal transmission line should not be included in rates at this time. Some
paries would have the Commssion ignore the Company's actual capital strctue
and substitute a hypothetical capital strctue forthe purpose of reducing the
revenue increase request. Some paries want the Commssion to allow a retu on
investment that would be among the lowest level in the nation and theaten the
Company's investment ratings. Others have ignored the outstanding cost control
efforts of the Company and request that the Commssion deny recovery of
employee's salares and benefits. Oters acknowledged that net power costs are
one of the Company's single largest expenses yet they would have you believe it
is okay to ignore issues because if they ar wrong the Company can collect the
diference though the Company's ECAM with only a one-yea lag and 10 percent
haicut. Finally, despite the Herculean efforts of the Company and regulatory
Walje, Di-Reb - 4
Rocky Mounta Power
1 staff from four states, including Idaho, to arve at a mutually acceptable
2 allocation methodology among the states, some paries have proposed different
3 allocation methods that would strand investments and costs among jursdictions.
4 Cost Control Efforts
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Explain the efforts the Company has made to control costs and keep
electricity prices reasonable.
Rocky Mountain Power has an obligation to our customers to provide safe and
reliable service, while keeping electrcity prices as low as reasonably possible.
Effective management of power costs and operating costs is one of the key
elements of the Company's strategy to meet this obligation. Since its acquisition
by MidAmerican Energy Holdings Company ("MEHC") in 2006, the Company
has continued to increase the efficiency of its operations. This is demonstrated by
a comparson of the Company's admnistrative and general ("A&G") costs in
Case No. PAC-E-07-05, which was based on Calendar year 2006, to the curnt
Application. In 2006, A&G costs were $239 millon, compared to $163 millon in
the curent application. That is a 32 percent decrease in A&G expenditues over a
four year period. The Company has worked hard to stre the right balance
between operational expenses, customer service, and preventive maintenance. In
addition, the Company has focuse on controllng labor costs. At the time of
MEHC ownership in March 2006 the Company's employee headcount was 5,997
full-tie equivalents ("FfEs"), as of the end of Decmber 2009 there were 5,650
Fls. Ths is a reduction of alost six percent of the Company's workforce.
Over that same period of time the Company has added thee new gas plants and
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Rocky Mountan Power
1 10 new wind facilities. Employee contrbutions for medcal and other benefits
2 have gone from modest amounts to 16 - 30 percent of the cost. Personal time-off
3 has been reduced and the defined benefit plan for pensions was frozen and a new
4 cash contrbution plan implemented. The success of these cost control efforts are
5 demonstrated by the reduction in A&G costs.
6 Additionally, the Company has reuced or deferred its capita investments
7 where feasible, implemented reviews of tax matters and coal strpping issues to
8 identify accounting changes, and made changes to its renewable energy credit
9 portfolio to the significant benefit of customers. Despite this focused effort to
1 Ó control cost, paries propose disallowance of employee salar and benefits, even
11 though per employee benefit costs have been reduced since the MEHC purchase
12 and wage increases for our employees are well within reason.
13 Monsto's Rate Impact
14 Q.As President of Rocky Mountain Power what is your response to Monsnto's
15 tesimony?
16 A.First, I would like to stress that Rocky Mountain Power has been able to provide
17 Monsanto among the lowest, if not the lowest price of electrcity in the world for
18 over 60 years. We are proud that we have been able to do that. In 2003
19 Monsanto stated that its rate was $18.50 per MW,i which is less than two cents
20 per kWh. Ms. Kathn E. Iverson states that Monsanto curently pays an "overall
21 average price of $30.64 per MWH"i which is stil less than four cents per KW.
i IPUC Final Orer No. 29157 Commssion Fmdings page 6.
2 Ivern dirt page 4 lies 18-19.
Walje, Di-Reb - 6
Rocky Mountain Power
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What is your response to Mr. Kevin P. Lawrence's testimony?
While I appreciate Mr. Lawrence's efforts to control costs for Monsanto I
completely disagree with his claim that electrcity is the reason that Monsanto
can't compete against the Chinese market. Mr. Lawrence acknowledges that
Monsanto's operation in Sodä Springs is competitive. Yet, like most businesses
and households there is a concern over rising costs. As a low-cost energy
producer, Rocky Mountain Power is extremely cost conscious and our prices
prove it. Idaho has the benefit of some. of the lowest electrcity prices in the
nation. Rocky Mountain Power prices figure promiently in that result. Among
Idaho electrcity consumers, Monsanto has the lowest priced electricity in the
state. See the following map of electrcity prices (source SNL Financial).
Walje, Di-Reb - 7
Rocky Mountain Power
2009 Statewide Average Price to Ultimate
Customers (Cents per KWH)
cents per KW
Iii !i50 - B.DO
1¡1¡i¡1¡1¡1M 8.01-11.00
. .11.01- "100
. 14.01-17.00
. 17.01- 21.00
.'L "--~..HI .2l.æ V
1 Q.Do you agree that Monsanto is challenged by Chinese competitors?
2 A.Yes, competition is a challenge. Yet, the Commssion should be aware of some
3 additional points not mentioned by Mr. Lawrence. Monsanto's patent on
4 Roundup expired in 2000 and yet it mantained an 80 percent (or more) maet
5 share of the glyphosate herbicides sold in the United States until it began to see
6 competition from China after the shar rise in Round Up pnces. It is estimated
7 that global consumption of weed kier wil grow over 12 percent annualy.3
8 Whe curnt market pressures are chalenging, Monsanto appear to have solidly
3 Glyphosate Comtitiveness Analysis in China. M2 Prsswir, M2 Communications Ltd, 2009,
Higbeam Reseach, November 8,2010, http://www.higbbe.com
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Rocky Mounta Power
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low costs of production. Morningsta says "we believe that Monsanto wil hold
its relatively attractive low-cost position in this business.',4
How do Rocky Mountain Power's electric rates compare to Chinese rates?
Based on publicly available data it appears that electrcity in China is
considerably more expensive than the prices Monsanto pays Rocky Mountain
Power. We are unliely to lear the exact price paid by Monsanto competitors in
China. Accordig to Beijing Electrc Power Corporation the price of electrcity
for industral use is 76 fens per kilowatt-hour, or 11 U.S. cents.5 In contrast as
noted by Ms. Iverson, Monsanto pays RMP less than four cents per kiowatt-hour.
Thus, China has no competitive advantage in terms of electrcity cost. Mr.
Lawrence noted that there are two primar reasons for the insurgence of the
Chinese into the market; technology and the price of electrcity. Contrar to Mr.
Lawrence's claim it appears Monsanto has the clear advantage on electrc prices.
Do you agree with Mr. Lawrence's assertion that electricity is the only input
over which Monsanto has no control?
No. Mr. Lawrence's clai can be shown to be without merit. Kennecott Uta
Copper, which is actually the largest load on Rocky Mountain Power's system,
and may other large industral customers have built their own generation or
combined heat and power resources to help control their electric costs. Mr.
Lawrence notes that some of the Chnese glyphosate plants have their own
generation resources. Monsanto certnly has the industral and financial
capabilty and load that would justiy this ty of investment. It is my
4 Roun Weighig on Monsanto, Ben Johson, Mornngsta, May 27,200.
5 htt://news.xinuaet.comlenglish00-11119IcontentI2492364.htm
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Rocky Mountan Power
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understanding that in the Company's ECAM discussions Mr. James R. Smith
contested that he could control the natural gas budget at the Soda plant and
thought it unreasonable that the Company couldn't control its natural gas costs. If
that is the case it seems investment in a generation facility certainly would
provide Monsanto with the price certainty it nees;
Furer, Mr. Lawrence acknowledges that technology is one of the key
cost drvers, yet in Mr. Smith's testimony Monsato acknowledges that it
constrcted two furnaces in 1952 and the third in 1966 which are stil in
operation.6 I'm certain that there have been significant technology advancements
that have occured since then that would disadvantage Monsanto with its
competitors. I'm not presumptuous enough to believe that I know what the state
of the ar in furace efficiency is today, but it is not an unreasonable observation
that Monsanto has chosen not to implement capital solutions because of the low
cost of electrcity. Now they would have the Commssion believe that paying the
actual cost of the electrcity Rocky Mountain Power provides is the sole
competitive that that makes their economic futue uncertin.
Ms. Iverson states repeatedly throughout her testimony that; "Monsanto's
loads are served at a lower quality of service.,,7 What is your response to thi
claim?
Ths is absolutely false. To use Ms. Iverson's verbiage this "in fact is a fiction that
does not reflect realty."g Monsato receives exactly the same service as any
other customer on the Company's system. In fact it is just the opposite, the recent
6 Smith dirt page 4, lines 6-14.
7 Ivern, dirt page 7lines 18-19, pae 10 lies 3-4, and page 12 lines 14-15, page 16 lies 6-19.
8 Ivern, dirct page 3 lie 10-13.
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Rocky Mounta Power
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completion of the Threemie Hil substation and the Populus to Termal line wil
enhance their aleady good reliabilty. Ironically Monsanto worked very closely
with the Company on this project because they understood its value to them.
How do you respond to Ms. Iverson's claim that Monsanto is forced to seU its
curtailment product?9
Rocky Mountain Power cannot force Monsanto to do anything. I've read though
Mr. Lawrence, Mr. Smith and Ms. Iverson's testimony and detected a central
theme. They would like you to believe that Monsanto is a poor defenseless victim
at the mercy of utility cost increases to which they have no alternatives or abilty
to mitigate. That is absolutely false. As a utilty Company we have the obligation
to provide electrc service to everyone in our servce terrtory--the exact same
service and have no legal or regulatory authority to cur Monsanto's service,
other than those rights mutually agreed to and approved by the Commssion. The
rates we charge our customers are established by this Commssion after careful
review and determnation that they are prudent, cost-based and fai. The service
provided in Idaho is defined and governed by the state's Electrc Service
Regulations. Regulation No.2;
"Service as use herein, usually refers to the availabilty of electrc
power and energy at the point of delivery for use by the Customer
irspective of whether power or energy is actually utilized. The
word "Service" may also be used to refer to the wires between the
Company's supply and the customer's entrance conductors."
Rocky Mounta Power has the obligation to provide electrc service.
There is no obligation to provide non-fir or interrptible service - that type of
service is aranged though a separte agrement between the Company and
9 Ivern, dir pae 14lie 8-12.
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Rocky Mounta Power
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Monsanto or other businesses that are willng to allow the Company to interrpt
their service and receive just financial consideration for that interrption.
Do you believe Ms. Iverson's statement; "Monsato desires first and
foremost to be a non.firm customer of a reguated utilty,,?10
I believe Monsanto wants to receive electrc service at well below maket price, I
don't believe Monsanto wants or believes that they should receive non-fi
service.
Why do you say that?
If Monsanto was truly a non-fir customer as they claim and would like you
believe, Rocky Mountan Power's dispatch office would be calling Monsanto
each day to let them know which hours of that day they could run their furaces,
because we need the electrc capacity for customers who do pay for fi service,
which obviously is not the case. Company witness Mr. Gregory N. Duval wil
fuer address Monsanto's appropriate treatment for jurisdictional alocations in
his testimony.
Historicaly, has Monsanto paid its true cost of service?
No. The Company has been working for over two decades to bring Monsanto to
full cost of service. In Order No. 30197 the Staf stated: "The proposed increase
contiues the priciple of cost cost-based service by moving Monsanto more than
halfway towar full cost of service."i i In Commssion Order 30783, from the
Company's 2008 general rate case (P AC- E-08-07) the results indicated that
Monsanto was paying only 87 percent of its cost of service, which was a $6.9
10 Iversn, page 3 lines 10-11.
11 Orer No. 30197 page 4.
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Rocky Mounta Power
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milion shortfall per year. The price increases requested in this case represent the
Company's actual costs of serving Monsanto
Do you have any concluding remarks?
Yes. I urge the Commssion to grant the Company the rate increase it has
requested. The Company has signifcantly underperformedrelative to its
authorized rate of retu in Idaho for a long period of time and it is time to correct
that situation. The Company.continues to build infrastructue to serve customers'
energy needs and to provide the reliabilty that they demand and deserve. In
meeting its obligations to customers, the Company should be treated faily and
receive adequate cost recovery and cash flows to allow it to attract financing so it
can continue to meet its obligation to serve customers at reasonable prices.
Does this conclude your rebuttl testimony?
Yes.
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Rocky Mounta Power