Direct Testimony of Daniel Schettler.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

In the Matter of the Application of PacifiCorp )
dba Utah Power & Light Company for ) Case No. PAC-E-01-16
Approval of Interim Provisions for the Supply )
of Electric Service to Monsanto Company. ) TESTIMONY OF
DANIEL R. SCHETTLER

Q: PLEASE STATE YOUR NAME, BUSINESS ADDRESS AND
EMPLOYMENT.
A: Daniel R. Schettler, Monsanto Company, 800 North Lindbergh Blvd, St.
Louis, MO 63167.
Q: WHAT IS YOUR CURRENT POSITION WITH MONSANTO
COMPANY AND WHAT DO YOUR RESPONSIBILITIES
INCLUDE?
A: Vice President, Procurement. I am responsible for purchase of raw
materials, energy, and goods and services required for the manufacture
of Monsanto products.
Q: PLEASE BRIEFLY DESCRIBE YOUR EDUCATIONAL
BACKGROUND AND BUSINESS EXPERIENCE.
A: I have a degree in economics from Drury University and a graduate
degree in finance at Washington University. I have been employed by
Monsanto for 35 years, and I have worked in virtually every business
sector in the company. I have been responsible for agriculture

Testimony of Daniel R. Schettler - Page 1
procurement since 1986, and was named Vice President of Procurement
in 2000.
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(1) PURPOSE OF TESTIMONY 3
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Q: WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A: The purpose of my testimony is to: (1) describe the worldwide
phosphorous market; (2) discuss market changes and competitiveness
resulting from new technology and foreign supplies; (3) describe how
phosphorous from the Soda Springs plant is used and marketed; (4)
describe why the Soda Springs plant must secure a stable source of
reasonably priced electricity to remain competitive and viable; (5)
describe curtailment terms acceptable to Monsanto from an operational
and economics perspective; and (6) provide the Commission with
Monsanto's recommended terms for electric service to Monsanto.

(2) PHOSPHOROUS MARKET AND COMPETITIVENESS 15
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Q: PLEASE DESCRIBE THE PHOSPHOROUS MARKET IN THE
US AND WORLDWIDE.
A: The global phosphorous market has experienced dramatic change in
the last 10 years. What began as an industry concentrated in the
United States and Europe for most of the 20th century has been
transformed rapidly to one dominated by the Chinese. In 1990 the
global elemental phosphorous market was 3.5 billion pounds, 85% of

Testimony of Daniel R. Schettler - Page 2
which was produced in Europe and North America. By 2001 the
market had shrunk to 1.6 billion pounds, 75% produced in China.
Today, outside of China, two elemental phosphorous plants remain in
Europe and one in the United States – Monsanto’s plant in Soda
Springs, Idaho.
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There are two primary reasons for this change - technology and the price of
electricity:
1. New technology, referred to as the wet acid process, has provided
industry with the phosphorus molecule at a significantly lower cost
than the cost of elemental phosphorous. Customers switched to wet
acid, and the demand for elemental phosphorous dropped by nearly
2 billion pounds.
2. High priced electricity led to the demise of U.S. and European
elemental phosphorous plants. Many of these have been replaced by
new furnaces in China, where power and labor costs are very low.
Electricity represents 30% –45% of the cost of producing elemental
phosphorous. As such, it is the largest single leverage factor, and the
only significant cost outside of the manufacturer’s control.

Q: PLEASE DESCRIBE HOW CHANGES IN TECHNOLOGY
HAVE AFFECTED THE PHOSPHOROUS MARKET AND THE

Testimony of Daniel R. Schettler - Page 3
IMPACTS EXPECTED IN THE FUTURE FROM NEW
TECHNOLOGY.
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A: On a global basis, 70% of elemental phosphorous is used to make
thermal phosphoric acid. The remaining 30% is used to produce
derivative products, the largest being phosphorous trichloride, one of
the raw materials Monsanto uses to manufacture glyphosate herbicide.
The wet acid process is an alternate, lower cost route to phosphoric
acid. Its use has grown dramatically and will continue to grow in the
future. This process is not suitable as a replacement for the 30% of
elemental phosphorous used for derivative products. New technology
has resulted in a reduction in the overall demand for elemental
phosphorous. As this trend continues, less efficient phosphorous
producers will be forced to cease operations.
While overall global demand for elemental phosphorous is flat at best,
the portion sold to the derivative products market is growing
modestly. This includes Monsanto’s phosphorous trichloride, used to
manufacture glyphosate.
Q: PLEASE DESCRIBE HOW FOREIGN SUPPLIERS HAVE AND ARE
EXPECTED TO IMPACT THE PHOSPHOROUS MARKET IN THE
FUTURE.
A: Historically, U.S. demand for phosphorous was supplied by U.S. sources
with some imports from Europe. Today, U.S. demand is met either by

Testimony of Daniel R. Schettler - Page 4
Monsanto or by the Chinese. A small quantity is imported from the
remaining European producer. Because of their cost position, the Chinese
offer phosphorous delivered to the U.S. for between $0.50 - $0.70 per pound.
U.S. pricing has historically been $0.90 - $1.00 per pound. Pricing from
Europe is about $0.70 per pound. At these price levels the Chinese will
continue to gain market share in the U.S and elsewhere. Given the substantial
excess capacity that exists in China, along with the large number of
producers, and the reduction in the cost of electricity anticipated with the
completion of the Three Gorges Dam project, pricing of elemental
phosphorous is not expected to increase for at least 5 years.
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Q: HOW IS PHOSPHOROUS FROM THE SODA SPRINGS PLANT
USED BY MONSANTO?
A: The Soda Springs Plant ships phosphorus to Monsanto plants in Luling,
Louisiana and Camacari, Brazil. There we convert the phosphorous to
phosphorus trichloride, a raw materials required to produce glyphosate. The
resulting glyphosate intermediate is then shipped from each of these locations
to plants around the world where the final products are formulated for the
local agricultural markets.
Q: IS PHOSPHORUS PRODUCED AT THE SODA SPRINGS PLANT
ALSO MARKETED TO OTHER END USERS?
A: All phosphorus not used internally by Monsanto is sold on a long-term cost
based agreement to Astaris, a joint venture between FMC and Solutia.

Testimony of Daniel R. Schettler - Page 5
Astaris has many uses for phosphorous, the most important being derivative
products for the food and industrial markets. There is no substitute for
elemental phosphorous in many of these products. Most of the remaining
phosphorous is used to produce phosphoric acid. The majority of Astaris’
phosphoric acid requirements are met by the low cost wet acid process. Soda
Springs phosphorous provides a supplement to this material. In addition,
Astaris sells a small portion of its phosphorous in the open market.
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Q: IS PHOSPHOROUS PRODUCED FROM THE SODA SPRINGS PLANT
UNIQUE OR DIFFERENT FROM PHOSPHOROUS PRODUCED FORM
OTHER SOURCES? IF SO, HOW DOES THE END USE OF ELEMENTAL
PHOSPHOROUS PRODUCED BY THE SODA SPRINGS PLANT DIFFER.
A: The phosphorous produced at Soda Springs is of very high quality and is similar to
the phosphorous produced in Europe. Some of the phosphorous in China is of low
quality and is used locally for fertilizer. The majority of Chinese phosphorous is
functionally equivalent to the Soda Springs and European phosphorous, and
competes in the same markets.
The Soda Springs phosphorous plant is unique in the world. All other
plants have had to sell most of their output into markets where competition from
“wet acid” phosphoric acid has eroded their profitability. Eventually they shut
down one furnace causing costs to escalate which makes them even less
competitive. The death spiral continues until they are out of business. All

Testimony of Daniel R. Schettler - Page 6
remaining phosphorous producers are faced with these conditions. The Chinese
will survive because of their cost position.
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The business model for Soda Springs is unique and has been successful
for years. More important, it is sustainable. There are two components:
1) The foundation of the model is to have a state of the art plant that is cost effective
and operating near capacity 360 days a year. Soda Springs is the most technically
advanced, safest and environmentally responsible plant in the world. It is the only
plant which meets the highest standards of OSHA VPP Star, Bureau of Land
Management and ISO 9002. Though not the lowest cost phosphorous plant, Soda
Springs can compete given today’s cost structure.
2) The vast majority of Soda Springs phosphorous goes to end markets
that cannot use “wet acid” as a replacement. Monsanto’s internal use of the
phosphorous is for the growing glyphosate market. Astaris’ share for
derivative products is growing modestly. The remainder is sold into the
phosphorous acid market. As Monsanto’s requirements grow, phosphorous is
withdrawn from the acid market. This allows Soda Springs to operate at
capacity and achieve lowest manufacturing cost.
Q: PLEASE DESCRIBE WHY PHOSPHOROUS PRODUCED AT THE
SODA SPRINGS PLANT MUST REMAIN COMPETITIVE WITH
OTHER SOURCES.
A: The majority of the phosphorous from Soda Springs is used by Monsanto to
produce phosphorous trichloride and then glyphosate. This market has grown at

Testimony of Daniel R. Schettler - Page 7
double-digit rates for twenty years. Monsanto fueled this growth by reducing
the selling price for Roundup herbicide. In the last ten years, we have reduced
the price globally by over 60%. We have maintained our profitability from the
growth in volume this generated.
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Going forward, the market is changing. Glyphosate global growth is
under 10 percent annually and profit margins have narrowed. Price reductions
no longer can be offset by volume growth. Monsanto and outside analysts
forecast glyphosate profits to fall in 2002, and each year in the future, as new
competitors continue to enter the market.
Monsanto has planned for this eventuality and is focusing on the seed
business for future growth in profits. Still, glyphosate is a critical element of
Monsanto’s product portfolio offered to farmers. To be successful in the future,
we will run the business to achieve the lowest possible cost. We have globally
sourced raw materials to reduce cost. We have implemented new technologies
to reduce cost. We have constructed new plants in other world areas to reduce
cost. We have outsourced to reduce cost. We have consolidated business and
changed suppliers to reduce cost. We are analyzing every element of Soda
Springs cost to effect reductions while still maintaining our high standards of
manufacturing operations.
Today, Monsanto can buy phosphorous from China and Europe at very
competitive prices. We have used and approved this alternate phosphorous for
our glyphosate production. We can deliver the phosphorous to our down stream

Testimony of Daniel R. Schettler - Page 8
locations in Louisiana and Brazil at lower cost than from our own production at
Soda Springs. Ultimately, if Soda Springs cannot remain competitive,
Monsanto will have no alternative but to purchase phosphorous from others.
The productivity of our people continues to improve. The quality of our mining
operation continues to improve, and our capital investments help maintain our
cost position. Only electricity is outside of Monsanto’s control in this equation,
and it is a huge portion of our total cost. Given continued low cost power, the
Soda Springs plant can remain a competitive source of phosphorous for
Monsanto and Astaris.
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Q: WHAT ALTERNATIVES DOES MONSANTO HAVE AVAILABLE
TO MEET ITS NEEDS IF PHOSPHOROUS FROM THE SODA
SPRINGS IS NO LONGER PRICED COMPETITIVE?
A. Monsanto has relationships with other phosphorous suppliers who have committed
to meet our requirements, should the need arise. We have tested and approved this
material. Pricing is attractive. Given the global overcapacity that exists today,
there would be no problem securing the needed volume for our glyphosate use.
(3) IMPORTANCE OF SPECIAL CONTRACTS 17
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Q: WHY IS IT IMPORTANT FOR MONSANTO TO RECEIVE ITS POWER
SUPPLY UNDER THE TERMS OF A SPECIAL CONTRACT?
A: A Special Contract establishing a known price for a set term is most important to
meet Monsanto’s critical needs of price certainty, price stability and reduced risk. It

Testimony of Daniel R. Schettler - Page 9
is also the best way to address the unique attributes of Monsanto’s load as well as
technical and safety issues.
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Q: WHY IS PRICE CERTAINTY AND STABILITY SO IMPORTANT TO
MONSANTO’S DECISION-MAKING PROCESS?
A: Soda Springs is a capital intensive facility. Unlike the vogue new companies
engaged in telecommunication services and dot.com projects, phosphorus
production requires long-term planning and millions of dollars of capital
investment. These investments must be made as much as ten years in advance of
their value creation. Also, because ours is a highly skilled (and highly paid)
workforce, it takes years of training and development to maximize the value of our
people.
Monsanto is nearing a crossroad with Soda Springs. Huge new
investments need to be made to develop the ore deposits for the future and install
the next generation of environmental equipment to insure compliance with ever
more stringent environmental regulations. To justify these investments and the
hiring and training of new employees, Monsanto must be able to assure its
stockholders that Soda Springs can remain in a competitive cost position. We must
have long-term, reliable, low cost electricity and we cannot live with dramatic
fluctuations in our power cost. We cannot have the uncertainty of being profitable
only when our power is cheap, while operating at a loss when PacifiCorp raises
our electricity price. These are not the economics that justify new capital
investments. Also, unlike aluminum smelters, irrigators and others, we cannot

Testimony of Daniel R. Schettler - Page 10
shut down for a year and reap the value of selling our electricity. We need to run
24/7 year in, year out.
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For fifty years Monsanto has operated Soda Springs successfully,
responsibly and reliably. Others have cut corners, lacked safety awareness, skirted
environmental issues and today they are gone. We have delivered value to our
customers, our shareholders, to our employees, and to Idaho. We can continue this
tradition if we can successfully manage our power cost.
Q: WOULD MONSANTO PREFER A NEW CONTRACT WITHOUT
ECONOMIC INTERRUPTIONS LIKE THE EXISTING 1995 CONTRACT?
A: Yes. Monsanto would much prefer no interruptions, if the price would be at or
near the current contract rate. Excepting periods of emergency interruption (as
provided for in the contract), this would enable Soda Springs to operate at full
capacity, which provides greatest production and lowest operating cost.
Q: GOING FORWARD, IS MONSANTO WILLING TO ACCEPT A
LEVEL OF INTERRUPTION AS IT DID PRIOR TO THE 1995
CONTRACT?
A: Yes. Monsanto is willing to take some interruptions to achieve a stable low
price for electricity. However, any interruption results in lower volumes of
phosphorus produced, and major interruptions can cause damage to the plant.
Therefore, the quantity, size and duration of interruptions need to be clearly
defined and agreed upon in advance.

Testimony of Daniel R. Schettler - Page 11
Q: EXPLAIN WHAT PLANNING DECISIONS MUST BE MADE ON A
LONG-TERM BASIS.
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A: All major capital expenditures, such as those made for plant improvements,
emission control and other equipment, resource acquisitions and mining
plans, require long-term planning and decision making.
Q: PLEASE IDENTIFY WHAT SPECIAL CONTRACT TERMS EXIST
THAT MONSANTO AND PACIFICORP HAVE BEEN UNABLE TO
REACH AGREEMENT ON WHICH MONSANTO REQUESTS THE
COMMISSION DETERMINE.
A: There are four primary areas of disagreement: (1) Single contract: We have been
unable to reach an agreement that Monsanto receive electric service under a single
integrated contract which provides for firm and interruptible service. PacifiCorp
insists upon a contract pricing Monsanto as a firm customer tied to tariff rates along
with separate short-term agreements entered into from time to time to provide for
curtailments. (2) Price: We have been unable to reach an agreement regarding the
price for electric service to Monsanto. Monsanto desires a single integrated price
for firm and interruptible service that is certain for the term of the special contract.
PacifiCorp insists upon tariff based rates priced as if Monsanto were a firm
customer. No consideration would be provided for economic curtailment, which
would be dealt with by way of separately negotiated short term contracts. (3)
Term: Monsanto needs a long-term contract preferably not less than five years.
PacifiCorp has proposed a one or two year contract for firm power and even shorter

Testimony of Daniel R. Schettler - Page 12
monthly agreements for interruptible power. (4) Curtailment: As one of the factors
to arrive at a single electricity price, Monsanto has offered certain amounts of
curtailment available at any time over the entire contract term to provide greatest
flexibility/benefit to PacifiCorp. PacifiCorp wants to buy curtailment only if and
when it is needed via contracts running weeks or a few months, and without
Commission approval or oversight.
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(4) PROPOSED SPECIAL CONTRACT 7
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Q: WHAT DOES MONSANTO RECOMMEND THE COMMISSION ADOPT
AS A NEW SPECIAL CONTRACT?
A: Monsanto respectfully recommends the Commission require that PacifiCorp
continue to supply electric service to Monsanto pursuant to a single
integrated contract providing both firm and interruptible energy. Monsanto
recommends that the term commence on the date the U.S. District Court
determines the existing 1995 Contract terminates, and continue for a term of
not less than five years. Monsanto recommends the Commission retain
Monsanto’s existing price of $18.50 per MWH by adding an amendment to
permit additional economic interruptions and operating reserve interruptions
of up to 800 hours. This is in addition to the emergency interruptions already
provided in the contract. The specifics are shown in the attached Exhibit “A”.
Q: CAN YOU READILY INCORPORATE THESE CHANGES IN THE
EXISTING CONTRACT?

Testimony of Daniel R. Schettler - Page 13
A: Yes. The existing contract has served both parties well, and can be updated
with minimal changes. Technical, safety and other standard provisions in our
existing contract need not be changed. These provisions are the produce of
our long relationship, our prior negotiations, and our previous contracts.
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Q: HAVE YOU UPDATED THE EXISTING 1995 CONTRACT TO
INCLUDE MONSANTO’S PROPOSED NEW TERMS?
A: Yes. Exhibit 210 is Monsanto’s proposed new Electric Service Agreement
with PacifiCorp in “redlined” version reflecting the changes. Exhibit 211 is a
clean copy.
Q: PLEASE DESCRIBE THE CHANGES REFLECTED IN THE
PROPOSED NEW AGREEMENT, EXHIBITS 210 AND 211.
A: On page 1, the dates have been changed to reflect the new term, which would
begin when the 1995 Contract ends, and continue for a period of five years.
The term set forth in paragraph 2.1 has been similarly changed. You will
note the second sentence is newly added to clarify the automatic renewal and
termination notice to avoid any potential future disputes, similar to which
arose over the termination date of the existing Contract that is being litigated
in Federal Court. A sentence has been added to paragraph 3.1 to add the
proposed new terms for up to 800 hours of economic and operating reserves
curtailments (in addition to existing emergency curtailment) which are set
forth and incorporated in the attached Exhibit “A”. Section 4 has been
revised to eliminate the previous paragraph 4.1.2 which dealt with the one-

Testimony of Daniel R. Schettler - Page 14
time $30,000,000 payment under the old Contract. The few other changes
are primarily minor updates which are non-substantive or for clarification
purposes. There are other changes that Monsanto would prefer to add, but
we have declined to do so in order to change only what is absolutely
necessary. In sum, the proposed new Contract is identical to the old Contract,
except for the new term and new curtailment provisions.
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Q: PLEASE DESCRIBE WHAT EFFECT THE CONTRACTS
PROPOSED BY MONSANTO WOULD HAVE ON THE
CONTINUED VIABILITY AND OPERATION OF THE SODA
SPRINGS PLANT.
A: We believe Monsanto’s contract proposal is fair and equitable to both
parties. We are willing to provide specific quantities of curtailment that
Pacificorp can use to manage peak load and meet operating reserves
requirements. We are also willing to provide this curtailment as fast as any
option on their entire system, thus providing maximum operating
efficiencies to PacifiCorp and reliability to their customers. Alternatively,
we are willing to accept a modest price increase if interruptions remain at
current levels for emergency purposes. Lastly, we are willing to accept a
five-year term contract, shorter than has been the precedence in many past
contracts.
Q: DOES THE NEW CURTAILMENT PROVISION PROPOSED BY
MONSANTO CAUSE YOU CONCERNS?

Testimony of Daniel R. Schettler - Page 15
A: Yes. The new curtailment provision contained in Monsanto’s proposed
contract adds considerable cost and risk for Soda Springs. Our challenge
will be to find ways offseting them. But, this is a contract we can live with,
and it provides the price stability and certainty we need to invest in the
future of our Soda Springs plant.
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Q: PLEASE DESCRIBE WHAT EFFECT THE PROPOSED
CONTRACTS PROPOSED BY PACIFICORP WOULD HAVE ON
THE CONTINUED VIABILITY AND OPERATION OF THE SODA
SPRINGS PLANT.
A: The contract proposed by Pacificorp is totally unacceptable to Monsanto. As I
have stated previously in this testimony, Monsanto must have reliable, predicable,
low cost power for Soda Springs to remain viable. Monsanto intends to continue
to invest in Soda Springs to upgrade the facility and reduce cost. To justify this
investment, Monsanto needs affordability and stability in electricity cost.
PacifiCorp’s proposal provides neither. Their pricing is grossly higher than we
can accept. Their short-term buy back of curtailments will result in a net price
that not only is unknown, but subject to never ending fluctuations. Stated another
way, there is no way for Monsanto to predict future pricing because of
PacifiCorp’s tariff structure and unwillingness to continue the traditional
approach to valuing our interruptibility. Under their proposal the cost of
electricity could fluctuate wildly from year to year. Monsanto cannot operate
Soda Springs with this uncertainty and variability.

Testimony of Daniel R. Schettler - Page 16

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Q: DOES THIS CONCLUDE YOUR TESTIMONY?
A: Yes.