HomeMy WebLinkAboutDirect Testimony of James Smith.pdf
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
) JAMES R. SMITH
I. INTRODUCTION 1
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Q PLEASE STATE YOUR NAME, EMPLOYER AND BUSINESS ADDRESS.
A My name is James R. Smith. I am employed by Monsanto Company and my business
address is P.O. Box 816, Soda Springs, Idaho 83276.
Q PLEASE PROVIDE YOUR EDUCATIONAL BACKGROUND, WORK
EXPERIENCE AND CURRENT POSITION AT MONSANTO.
A I graduated from Utah State University in 1986 with a B.S. in accounting. I began
working for Monsanto in 1988 as an accountant at the Soda Springs plant and have
continued to work for Monsanto to date in various capacities. I am currently the
purchasing supervisor for the Soda Springs plant and Rock Springs, Wyoming coke plant.
Q WHAT RESPONSIBILITIES DO YOU HAVE FOR MONSANTO REGARDING
THE PURCHASE OF ELECTRICITY?
A I am responsible for all purchases at the Soda Springs and Rock Springs plants including
electricity. During my employment at Monsanto I have been directly involved in all
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electricity contract negotiations and all electrical contracts entered into between Monsanto
and PacifiCorp since 1988. I have also reviewed and am familiar with previous electricity
contracts serving the Soda Springs plant.
Q WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A The purpose of my testimony is to: (1) provide a history and information concerning the
operation of Monsanto’s Soda Springs plant; (2) review the history of Monsanto’s special
contracts for electric service; (3) discuss the background and present status of the current
1995 special contract; (4) review recent agreements in 2000, 2001 and 2002 providing
PacifiCorp with additional operating reserves and curtailments; (5) provide an overview
of negotiations towards a new contract and discuss the differences between the new
contract proposal of PacifiCorp and Monsanto; (6) discuss pricing methods proposed by
PacifiCorp and adopted by the Commission in prior contract approval proceedings; and
(7) to review the history and function of Monsanto interruptibility.
Q PLEASE INTRODUCE THE OTHER WITNESSES TO BE PRESENTED BY
MONSANTO IN THIS CASE.
A Daniel Schettler, Vice President of Procurement for Monsanto, will present testimony
regarding the phosphorus market worldwide and the importance of the Soda Springs Plant
remaining competitive. Mr. Schettler also will present Monsanto’s senior management
perspective and will discuss operational and economic curtailment limitations. Finally,
Mr. Schettler will present Monsanto’s recommended terms for a new special contract.
Richard Anderson of Energy Strategies, L.L.C., will describe the rationale as to why
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Monsanto should continue to be provided electric service as a special contract
interruptible customer of PacifiCorp and will address the allocation of Monsanto costs
and revenues and other related issues. Kathryn Iverson of Brubaker & Associates, Inc.,
will critique and make recommendations regarding PacifiCorp’s proposed cost of service
studies. Alan Rosenberg of Brubaker & Associates, Inc. will present testimony valuing
Monsanto interruptibility and will make pricing recommendations for Monsanto electric
service. Cory Hoffman, an economist, will present testimony concerning the economic
impact of Monsanto upon the regional economy in southeast Idaho.
II. HISTORY AND OPERATION OF SODA SPRINGS PLANT 9
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Q CAN YOU PROVIDE A BRIEF HISTORY AND OVERVIEW OF THE
OPERATION OF MONSANTO’S SODA SPRINGS PLANT?
A Yes. The Soda Springs plant began operations in 1952. Since opening it has operated
continuously and without layoffs of employees. The plant produces elemental
phosphorus (“P4”), an essential building block for many end products. Phosphate ore
mined in the mountains east of Soda Springs is combined with coke and quartzite, then
melted in electric arc furnaces resulting in a chemical reaction enabling phosphorus to be
separated and extracted. Historically, electricity has represented approximately one-third
of the production costs. With the recent closure of the FMC - Astaris plant in Pocatello,
Monsanto’s three electric furnaces are the only ones remaining in operation in the U.S.
Q DESCRIBE THE ELECTRIC FURNACES OPERATED BY MONSANTO.
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A Monsanto’s first six electric furnaces to manufacture phosphorus were built and operated
in Columbia, Tennessee. That plant closed in approximately 1986 when it became
uncompetitive to operate, primarily due to rising electricity costs. At the Soda Springs
Plant, Monsanto initially constructed Furnaces No. 7 and 8 which began operating in
1952. Later No. 9 Furnace was constructed and became operational in 1966. The No. 9
Furnace was the last and largest electric arc furnace constructed in North America.
Q WHAT ARE THE SIZES OF FURNACES 7, 8 AND 9 AT THE SODA SPRINGS
PLANT?
A Furnace No. 7 is approximately 46 MW, Furnace No. 8 is approximately 50 MW, and
Furnace No. 9 is approximately 67 MW for a total of 163 MW.
Q CAN ALL OF THESE FURNACES BE INTERRUPTED?
A Yes, all of these furnaces can be interrupted separately as well as together in any
combination. Interruptions occur for emergency, economic, operating reserve and other
reasons within the parameters defined by the contract in place at the time.
Q HOW DO INTERRUPTIONS OCCUR?
A There is a direct phone line from PacifiCorp’s dispatch to Monsanto’s control room.
When a call is received Monsanto can and does interrupt immediately within a matter of
seconds.
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Q ARE THERE OPERATIONAL LIMITATIONS ON HOW LONG A FURNACE
CAN BE OFF?
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A Yes. Monsanto has the ability to curtail one or two of its furnaces for up to 4 hours.
While interruptions of all furnaces for longer periods of time are feasible, such
interruptions would give rise to a number of operational problems that would have to be
dealt with to protect the kiln and other facilities from damage, as well as to comply with
emissions requirements.
Q WHEN NO. 9 FURNACE BECAME OPERATIONAL IN 1966, HOW MANY
ELECTRIC FURNACES PRODUCING PHOSPHORUS WERE OPERATING IN
NORTH AMERICA?
A There were 31 furnaces in North America in 1966.
Q HOW MANY OF THOSE 31 FURNACES ARE OPERATING TODAY?
A Only the three furnaces at Monsanto’s Soda Springs Plant.
Q DO YOU HAVE KNOWLEDGE CONCERNING WHAT THE PRINCIPAL
FACTORS WERE IN THE CLOSURE OF ALL OTHER FURNACES IN NORTH
AMERICA?
A Mr. Schettler will provide more specific testimony in answer to this question. There were
several factors which contributed to the closure of these other furnaces. These include
rising electricity prices and the emergence in recent years of new technology which
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permits fertilizer grade phosphate to be purified into phos acid, commonly known as the
purified wet acid ("PWA") process.
Q IS IT A FORGONE CONCLUSION THAT MONSANTO’S SODA SPRINGS
PLANT WILL ALSO BECOME ECONOMICALLY UNFEASIBLE AND GO OUT
OF BUSINESS?
A No. While that is a possibility, I believe the Soda Springs Plant can remain economically
feasible and continue operating at full capacity, provided that we are able to secure a new
long term special contract providing electricity at a reasonable price as proposed by
Monsanto.
Q HOW MUCH ELECTRICITY DOES MONSANTO CONSUME AT THE SODA
PLANT?
A Approximately 1.4 billion kWh of energy is consumed annually. We are PacifiCorp’s
largest single point customer.
Q HOW MANY EMPLOYEES ARE EMPLOYED BY MONSANTO RELATING TO
THE OPERATION OF THE SODA SPRINGS PLANT?
A On average, 700 full time employees are employed in the operation of the Soda Springs
Plant. Of these, an average of 380 are direct full-time employees of Monsanto. The
remaining 320 employees are full-time employees of our mining and other sub-
contractors. There are also many additional part-time and seasonal employees of
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Monsanto and our sub-contractors not included in these numbers. There have been no
significant changes year to year in these employment numbers over the past 30 plus years.
Q WHERE DO THE FULL-TIME EMPLOYEES RESIDE?
A The breakdown by county is as follows: Caribou - 409, Bannock - 113, Bear Lake - 110,
Franklin - 19 and other - 49.
Q WHAT WAS MONSANTO'S TOTAL PAYROLL FOR YEAR 2001?
A The payroll and benefits for all Monsanto full-time, part-time and seasonal employees in
2001 was $35,778,000.00. This does not include amounts paid to employees of sub-
contractors.
Q WHAT DOES MONSANTO PAY ANNUALLY IN ADDITION TO IDAHO
VENDORS?
A In 2001, Monsanto paid over $61 million dollars to 417 Idaho vendors using Idaho
employees.
III. HISTORY OF MONSANTO ELECTRICAL CONTRACTS 14
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Q PLEASE PROVIDE THE HISTORY OF THE MONSANTO ELECTRICAL
CONTRACTS.
A Monsanto entered into its first special contract with Utah Power and Light Company to
provide electrical service at the Soda Springs Phosphorus Plant on April 30, 1951, ("1951
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Contract") for a term of ten (10) years. The contract supplied 54 MW of interruptible and
6 MW of firm power.
After No. 9 furnace became operational, an additional contract was entered into
January 22, 1965 ("1965 Contract") to supply an additional 70 MW of electricity for a
furnace for 10 years. This contract was also interruptible for economic and emergency
reasons. Idaho Power was an additional supplier to this contract pursuant to an
arrangement between Idaho Power and Utah Power.
The 1951 Contract and the 1965 Contract continued to be extended until replaced
by a new contract entered into July 3, 1991 ("1991 Contract"). The 1991 Contract
consolidated the service under the prior agreements into a single contract. This contract
provided for the supply of 9 MW of firm power and 154 MW of interruptible for a five-
year term through June 30, 1997. Monsanto was subject to both emergency and economic
curtailment.
The 1991 Contract was replaced by the current 1995 Contract entered into on
November 1, 1995, which provides for 9 MW of firm power and 206 MW of interruptible
power. This contract allowed Monsanto to be interrupted for system emergency purposes
but not for economic reasons. This is the first and only contract that did not provide for
economic interruptions for reasons which will be discussed below.
Q HAS MONSANTO EVER RECEIVED POWER AT THE SODA PLANT AS A
FIRM TARIFF RATE CUSTOMER?
A No. Monsanto has always received power pursuant to a special contract. PacifiCorp does
not have any tariff rates in Idaho applicable to large industrial users. The last industrial
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tariff in Idaho was eliminated in 1990. At that time and prior, Utah Power had Schedule
13 which provided a tariff rate for customers over 15 MW. Utah Power had no customers
on that tariff at that time. Accordingly, on May 18, 1990, PacifiCorp Sr. Vice President
John A. Bohling wrote the commission stating:
Utah Power would prefer to see the schedule eliminated and hereby
makes that request to the commission. Schedule No. 13 for large
industrial services has never been used by any customer. Currently there
are no customers on it and in the future any customers who would
qualify, having loads over 15,000 KW, would be provided for under a
special contract.
IV. EFFECT OF 1988 AND 1999 PACIFICORP MERGERS 11
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Q WHEN PACFIC POWER AND UTAH POWER MERGED IN 1988 DID THE
COMMISSION ADDRESS MONSANTO’S SPECIAL CONTRACT THEN IN
EFFECT?
A Yes. In Order No. 21867, entered in April1988, the Commission stated that Monsanto
would continue as a special contract and be treated as an interruptible system customer,
but would not share in the merger rate reductions. The Commission stated in Order No.
21867 at page 10 as follows:
The merged company will continue Monsanto’s special contract with
Utah Power. Monsanto will not share in the immediate 2 percent
reduction proposed for Utah Power’s tariff customers, but would benefit
by the merged system’s reduced fuel costs through its fuel adjustment
clause.
Monsanto will continue to be treated as an interruptible customer, not
only for the Utah Power Division, but for the entire merged system’s
power supply needs. . . . Furthermore, as a matter of policy, the merged
company will not seek to interrupt Monsanto to make more lucrative
off-system sales. (Case Nos. U-1152-1, U-1009-184, U-1046-16)
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Q AFTER THE 1988 UTAH POWER-PACIFIC POWER MERGER, DID
MONSANTO EXPERIENCE AN INCREASE IN THE ECONOMIC
CURTAILMENTS?
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A Yes. At the time of the merger, promises were made that Monsanto would be interrupted
less by the merged company. However, after the 1988 merger, Monsanto experienced a
substantial increase in the number and duration of curtailments to levels far more then had
ever been experienced under Utah Power. In order to sustain operations at desired levels,
Monsanto expended considerable sums to purchase power during curtailments in order to
supply customer orders.
Q HAVE YOU PREPARED AN EXHIBIT REFLECTING THE HISTORY OF
CURTAILMENTS AT THE PLANT?
A Yes. Exhibit 201 reflects the Soda Springs plant Curtailment History from 1986 to date.
It was prepared by me and is based upon the daily logs maintained by our operators.
Q PLEASE EXPLAIN THE “TOTAL CURTAILMENT” SHOWN IN COLUMN 1.
A Column 1 reflects the “Total Curtailments” in kWh from 1986 forward. As can be seen,
these curtailments increased substantially beginning in 1988 after the Utah Power-Pacific
Power merger. The Total Curtailment numbers reflected in Column 1 are the total of
Column 2, which is the System or Emergency Curtailments and Column 3 which is
Economic Curtailment, and Column 5, which is Operating Reserve Curtailment.
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Q PLEASE DESCRIBE COLUMN 2 ENTITLED SYSTEM CURTAILMENT? 1
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A Column 2 reflects curtailments by PacifiCorp for system emergency purposes. You will
note Column 1 and Column 2 are the same after 1995 until 2000. This is because the
1995 Contract only provides for curtailment for emergency purposes. No economic
curtailment provisions were included in the 1995 Contract. Such provisions were not
needed by PacifiCorp because they then had excess power, and there was a surplus on the
market.
Q PLEASE DESCRIBE COLUMN 3 ENTITLED “ECONOMIC CURTAILMENT”.
A Column 3 reflects Economic Curtailments as allowed pursuant to the Contracts in effect
in each of the years. As can be seen, after 1995 there were no Economic Curtailments.
This is because the 1995 Contract did not provide for Economic Curtailments for the
reasons I discussed above.
Q PLEASE DESCRIBE COLUMN 4 ENTITLED “PREMIUM PAID”.
A The “Premium Paid” reflected in Column 4 is the amount paid by Monsanto to PacifiCorp
to buy-through economic curtailments. These buy-through expenditures were not
anticipated at the time of the 1988 merger. Prior to the merger, in order to secure
Monsanto’s support for the merger, promises were made by Pacific Power and Utah
Power management to Monsanto management that Monsanto would see less economic
curtailment after the merger. Unfortunately, the actual curtailments turned out to be much
greater.
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Q PLEASE DESCRIBE COLUMN 5 ENTITLED “OPERATING RESERVE”. 1
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A Column 5 entitled “Operating Reserve” reflects curtailments in 2000, 2001 and 2002
pursuant to separate agreements entered into in those years as discussed below.
Q PLEASE DESCRIBE EXHIBIT 201, P. 2 “MONSANTO POWER
CURTAILMENTS BY MONTH”.
A Exhibit 201, p. 2 sets forth the total number of furnace interruptions by month for the
years 1992 to date.
Q WHEN PACIFICORP AND SCOTTISHPOWER MERGED IN 1999, DID
MONSANTO SHARE IN THE $6.4 MILLION MERGER-RELATED COST-OF-
SERVICE REDUCTIONS PROVIDED BY WAY OF A MERGER CREDIT?
A No. The merger credit was allocated among PacifiCorp’s retail tariff customers. In Order
No. 28213 issued November 15, 1999, in Case No. PAC-E-99-1, the Commission stated:
ScottishPower and PacifiCorp shall provide guaranteed merger-related
cost-of-service reductions for four years through an annual merger
credit. The amount of credit shall be $1.6M per year for the years 2000,
2001, 2002, and 2003. The total credit in years 2000-2003 will be
$6.4M. The merger credit shall be allocated among PacifiCorp’s retail
tariff customers on the basis of a percentage of the customer bill,
exclusive of taxes. . . .
Q WERE MONSANTO’S RATES AS A SPECIAL CONTRACT CUSTOMER
AFFECTED AS A RESULT OF THE RECENT POWER COST SURCHARGE IN
CASE NO. PAC-E-02-1?
A No. On June 7, 2002, the Commission entered Order No.29034 in Case No. PAC-E-02-1
approving the proposed settlement entered into between PacifiCorp, Staff, the Idaho
Irrigation Pumpers Association and Monsanto. The resulting proposed changes in rates
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over those in effect in 2000 for tariff rate customers are a 34 percent decrease for
Schedule 6A General Service Customers; a 28.2 percent decrease for residential
customers; a 28 percent decrease for irrigation customers; and a maximum of 4 percent
increase for Schedules 6, 9, 10 and 13 Commercial and Industrial Customers. See Order,
p. 7, Stipulation Attachment B, Table BB2.
Q DO THE ORDERS DISCUSSED ABOVE ILLUSTRATE THE DIFFERENCE
BETWEEN BEING A SPECIAL CONTRACT CUSTOMER VS. A TARIFF
CUSTOMER?
A Yes. If Monsanto were a firm customer, or if its special contract provided a rate tied to
firm tariff rates, rates would vary up or down on a case by case basis. As a special
contract customer, Monsanto rates are established by the terms of the contract for the term
of the contract. This provides price certainty and stability for a set period. This is critical
to Monsanto’s planning and operational decisions affecting capital expenditure decisions
at the plant, as well as mining, production and marketing decisions.
V. 1995 SPECIAL CONTRACT 15
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Q CAN YOU PROVIDE BACKGROUND REGARDING THE NEGOTIATIONS
THAT PRECEDED THE 1995 CONTRACT?
A Yes. I was directly involved in those negotiations as part of Monsanto’s negotiating
team. Under the 1992 Contract which was scheduled to run through 1997, Monsanto
began paying $22.265 per MWH in 1992 which increased to $24 in 1993 and was
scheduled to increase to $25 in 1995 and $26 in 1997.
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Monsanto entered into negotiations with PacifiCorp in 1994, which continued
through 1995, in an effort to replace the 1992 Contract and bring pricing more in line with
PacifiCorp’s current cost of energy. This resulted in the 1995 Contract.
During negotiations there were large surpluses of power in the electricity market
and PacifiCorp had excess capacity. At times, power on the open market was trading as
low as $2 per MWH at the same time Monsanto’s rates were scheduled to increase.
Additionally, at that time, deregulation efforts were being pursued across the country and
it was anticipated that all markets would deregulate in three to five years, resulting in
lower prices. Additionally, factors in the phosphorous market rendered it imperative for
Monsanto to make changes in order to remain competitive.
Q DID MONSANTO PAY PACIFICORP ADDITIONAL CONSIDERATION TO
TERMINATE EARLY THE 1991 CONTRACT?
A Yes. As a part of the consideration, Monsanto paid PacifiCorp a one time cash payment
of $30 million. This payment is described in paragraph 4.1.2 of the 1995 Contract as
follows:
4.1.2 In consideration for the termination of that certain power supply
agreement dated July 3, 1991, and PacifiCorp’s release of Monsanto and
settlement of all outstanding obligations arising thereunder, Monsanto
shall pay PacifiCorp THIRTY MILLION DOLLARS AND NO/100
($30,000,000.00) . . .
Q HOW WAS THE $30,000,000 PAYMENT TREATED?
A The ratemaking treatment of the $30 million payment was not determined by the
Commission at the time thje 1995 Contract was approved by Order No. 26282.
The Commission stated:
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Utah Power states that it does not seek a determination at this time on the
ratemaking treatment applicable to Monsanto’s $30 million payment or
the other rates and charges under the New Agreement. The Company
requests that all ratemaking issues be reserved for a rate case.
Consequently, treatment of the payment has not yet been determined.
Q WHAT SIGNIFICANT CHANGES WERE MADE IN THE 1995 CONTRACT?
A The price for all energy delivered was reduced to $18.5 per MWH. Economic curtailment
provisions that had existed in all prior contracts were eliminated. This was because
PacifiCorp had substantial excess capacity, and there was excess power and low prices in
the market. Pricing mechanisms were also substantially simplified to eliminate demand
charges and excess energy charges. Firm and interruptible charges were rolled into a
single energy rate of $18.5 per MWH.
Q WHEN PACIFICORP MADE APPLICATION TO THE COMMISSION TO
APPROVE THE 1995 CONTRACT, DID IT DISCUSS THE CIRCUMSTANCES
EXISTING AT THAT TIME IN THE ELECTRICAL MARKET AND THE BASIS
UPON WHICH THE PRICE WAS DETERMINED UNDER THE NEW
CONTRACT?
A PacifiCorp described the circumstances that existed in 1995 and the basis upon which
Monsanto’s new contract was priced in its “Application” to the Commission seeking
approval of the new 1995 Contract and also in PacifiCorp’s “Technical Assessment
Package”, filed with the Commission, Exhibits 202 and 203. The Contract was priced
based upon meeting variable costs with a reasonable contribution to fixed costs. The
Application stated:
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9. The New Agreement provides substantial benefits to Utah Power’s
other customers. Monsanto is the Company’s single largest customer,
contributing over 28 percent of all retail revenues from all customer
classes in Idaho. Revenues from Monsanto contribute to Utah Power’s
recovery of fixed costs, which allow the Company to charge lower prices
to its other customers.
10. The New Agreement will provide additional benefits beyond the
increase in contributions to fixed costs. The $30 million up-front
payment will fully compensate for the termination of the Existing
Agreement.
The Technical Assessment Package provided analysis of Monsanto’s contribution
to fixed costs. The Commission’s Order No. 26282 approved the Contract as “fair, just
and reasonable” based on a pricing methodology of meeting PacifiCorp’s variable costs
with a reasonable contribution to fixed costs. This method has been consistent throughout
Monsanto’s special contract history. Until now, PacifiCorp has never sought to price
Monsanto as a situs customer priced based on traditional costs of service methods.
Q WHEN DOES THE 1995 CONTRACT TERMINATE?
A It is Monsanto's position that the 1995 Contract is an "evergreen" contract, which
continues until terminated by one of the parties upon one year’s notice, given in
compliance with the terms of the contract. Monsanto and PacifiCorp are in dispute over
the validity and effect of attempts made by PacifiCorp to terminate the contract on
December 31, 2001. This dispute is presently being litigated in the U.S. District Court for
the District of Idaho, Case No. CV-01-607-E-BLW. Attempts to secure an early
resolution before the Court of this contract interpretation dispute based on summary
judgment motions were unsuccessful. The case is now scheduled for trial August 4, 2003.
As requested by the parties, mediation before a Federal Magistrate Judge is scheduled.
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Q WHEN WOULD THE NEW RATE ESTABLISHED IN THIS PROCEEDING BE
EFFECTIVE?
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A Any new rate established by the Commission in this proceeding would take effect upon
the date the U.S. District Court determines that the 1995 contract ends. Until that time,
the existing rate under the 1995 contract of $18.5 per MWH would remain in effect,
subject to a “true-up” mechanism which both parties agreed to and the Commission
adopted. Accordingly, if the Court determines that the existing contract ended December
31, 2001, as asserted by PacifiCorp, Monsanto would pay the newly-established rate from
January 1, 2002, plus 4 percent interest on the difference between the interim rate of
$18.5 per MWH and the new rate. On the other hand, if the Court determines that the
1995 contract terminates December 31, 2002, or a later future date, the new rate would
take effect on that date and there would be no need for a true-up.
VI. 2000, 2001 AND 2002 CURTAILMENT AGREEMENTS 13
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Q ALTHOUGH THE 1995 CONTRACT DOES NOT ALLOW PACIFICORP TO
INTERRUPT MONSANTO FOR ECONOMIC REASONS, HAVE THE PARTIES
ENTERED INTO AGREEMENTS PURSUANT TO WHICH PACIFICORP HAS
PURCHASED ADDITIONAL INTERRUPTIONS FROM MONSANTO?
A Yes. In recent years, at PacifiCorp’s request, Monsanto has entered into four separate
agreements to provide for economic interruptions. Economic interruptions are not
provided for under the 1995 Contract. Three separate Operating Reserve Agreements
were entered into in 2000, 2001 and 2002, which enabled PacifiCorp to curtail Monsanto
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and obtain needed operating reserves. The 2000 and 2001 Operating Reserve Agreements
are included in Exhibit 5 to the Direct Testimony of Bruce W. Griswold. Additionally, an
Operating Reserve Agreement was recently entered into on July 9, 2002, to provide short-
term operating reserve interruption rights during the period July through September this
year. The terms of the 2002 Agreement are generally the same as the prior Agreements,
except for the price, which has doubled this year from what was previously paid.
An Outage Deferral Agreement was also entered into in 2001 to defer a shutdown
of one of our furnaces from the spring to July and August of 2001 when PacifiCorp was
projecting shortages of electricity and high market prices due to the energy crisis. This
agreement is attached as Exhibit 6 (CONFIDENTIAL) to the Direct Testimony of Bruce
W. Griswold.
Q WERE THE RECENT OPERATING RESERVE AGREEMENTS AND OUTAGE
DEFERRAL AGREEMENT SUBMITTED TO THE IDAHO PUBLIC UTILITY
COMMISSION FOR APPROVAL?
A No. We made an inquiry to PacifiCorp to determine if Commission approval was needed
and were informed it was not required.
Q DID MONSANTO RECEIVE COMPENSATION FOR THESE ADDITIONAL
CURTAILMENT AGREEMENTS?
A Monsanto did receive compensation for additional curtailment under the Operating
Reserve Agreements. Under the Outage Deferral Agreement Monsanto received a
payment for providing PacifiCorp with the right to decide when the shutdown would start.
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This payment was to reimburse Monsanto for the expenses of having its contractors on
hold pending PacifiCorp's decision when to start the shutdown. The Outage Deferral
Agreement also called for Monsanto to share in the savings 50/50 between the spring
energy price and the summer energy price. However, no payments were received for the
deferral because summer prices dropped following the FERC imposed price caps.
Q WAS MONSANTO INTERRUPTED BY PACIFICORP BETWEEN 2000 AND
EARLY 2002?
A Yes. During the period March 8, 2000, through January 23, 2002, Monsanto was
interrupted 100 times, of which 97 were for operating reserves. These interruptions are
reflected in Exhibit 204, “Monsanto Curtailments 2000-2002”. The 2002 Operating
Reserve Agreement was entered into July 9, 2002, and provides for additional
interruptions between July 9 and September 15, 2002 not reflected in Exhibit 204.
Q DURING THE PERIOD OF RECORD HIGH ENERGY PRICES IN 2000 AND
2001, DID MONSANTO OFFER TO PACIFICORP ANY ADDITIONAL
CURTAILMENT?
A Yes. Monsanto offered to curtail one of its furnaces during December of 2000 and again
in January of 2001. During this period of energy crises, Monsanto had been contacted by
another utility that was desperate for energy. Monsanto was temporarily long on
inventory and was willing to curtail one furnace for up to a week. I made this proposal to
Mr. Griswold of PacifiCorp. He flatly declined both offers and there were no further
discussions of price or other terms. This is an example of why we feel it is critically
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important to price both firm and interruptible power in a single contract. Short-term
curtailment agreements provide no bargaining power to Monsanto since it has no access
to any other purchasers in the market.
Q DID YOU INFORM THE COMMISSION THAT MONSANTO’S OFFER OF
ADDITIONAL CURTAILMENTS DURING THE ENERGY CRISIS HAD BEEN
REJECTED?
A Yes. In response to an inquiry regarding what Monsanto was doing to help ease the
energy crisis, I sent a letter explaining what had occurred on January 9, 2001, which is
attached as Exhibit 206. Apparently this was brought to PacifiCorp’s attention, evoking
response by Mr. Griswold’s letter dated January 16, 2001, which is attached as Exhibit
206. These letters were part of the record in the PacifiCorp deferred accounting case,
Docket No. PAC-E-02-1. While I disagree with much of what was said in Mr.
Griswold’s letter, further discussion in this case serves no useful purpose. The problem
does illustrate why reliance upon short-term operating agreements can be problematic and
will not provide the price certainty and stability needed by Monsanto.
Q EXPLAIN WHY MONSANTO WAS WILLING TO ENTER INTO THE RECENT
OPERATING RESERVE AGREEMENTS.
A There were several reasons. First, Monsanto wanted to do its part to assist with the
energy crisis at hand, which was fundamentally the right thing to do at the time to help the
region out. Recall that Monsanto's existing contract did not contain economic curtailment
provisions that had been in all of the prior contracts. Second, Monsanto would receive
Testimony of James R. Smith - Page 20
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compensation for curtailment at a price that made it economically feasible based upon
circumstances existing at that time. Third, we wanted to demonstrate to PacifiCorp that
Monsanto could in fact provide a substantial and unique benefit to the system as a whole
in the form of operating reserves and load balancing. Fourth, we felt it was important to
help PacifiCorp meet its needs and obligations and reach an agreement on some items in
an effort to show good faith, and build on that success with regard to the power supply
contract negotiations that were ongoing.
VII. PROPOSED NEW SPECIAL CONTRACT 8
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Q PLEASE DESCRIBE THE EFFORTS MADE TO NEGOTIATE A NEW
SPECIAL CONTRACT.
A Shortly after the PacifiCorp-ScottishPower merger negotiations began in 1999, Monsanto
felt it was important to start discussions as soon as possible with the new PacifiCorp
management. This is because Monsanto's ability to secure a continuous and long term
power supply contract is critically important for long term planning and capital
expenditure purposes, which are dependent upon an affordable and reliable source of
electricity. Historically, Monsanto begins negotiations of a new power supply contract
well in advance of the expiration date. Accordingly, it has been common to terminate an
existing contract early and replace it with a new contract as occurred in 1965, 1987, 1991
and 1995. While the negotiation process can be difficult and time consuming, up until
now it has always resulted in a new power supply contract at rates that were fair and
reasonable to Monsanto and PacifiCorp. In each instance the negotiated agreement was
approved by the Commission. Unfortunately, negotiations to replace the 1995 Contract
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have not been successful and are at an impasse which must be resolved by the
Commission. We believe this was primarily and directly a result of PacifiCorp’s
insistence upon substantially new and different terms and pricing methods from those that
have proven successful and mutually beneficial in the past.
Q DESCRIBE THE CHANGES PACIFICORP HAS REQUESTED IN THE NEW
POWER SUPPLY CONTRACT WHICH ARE SIGNIFICANTLY DIFFERENT
FROM ALL PRIOR CONTRACTS.
A PacifiCorp is insisting upon several new and significant changes detrimental to Monsanto
which would alter the special contract methods that have successfully been utilized for
many years. First, PacifiCorp insists upon pricing Monsanto as a firm tariff customer
based on costs of service methodologies. This would raise Monsanto’s rates from $18.5
$31.4 per MWH, an increase of 70% of $18 Million. Second, PacifiCorp insists on
Monsanto’s rates being tariff based rather than set for a specific contract term. Third,
PacifiCorp is no longer willing to provide both firm and interruptible electric service to
Monsanto pursuant to a single integrated contract. Instead, PacifiCorp proposes a “so-
called” firm tariff rate contract leaving Monsanto to attempt to negotiate a series of short-
term contracts to provide payment for whatever operating reserves, load balancing or
other curtailments PacifiCorp may decide to buy. Fourth, PacifiCorp proposes to
eliminate Monsanto as a system customer for revenue and cost allocation purposes.
Instead, Monsanto would be treated as a "situs" customer for revenue and cost allocation
purposes.
Testimony of James R. Smith - Page 22
Q DOES MONSANTO BELIEVE THAT CHANGES HAVE OCCURRED TO
JUSTIFY DEPARTURE FROM THE HISTORIC BASIS UPON WHICH
MONSANTO SPECIAL CONTRACTS HAVE BEEN APPROVED BY THE
COMMISSION?
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A No. There has been no material change in the location, size, load factor, or other
characteristics of Monsanto's electricity requirements since the No. 9 furnace came on
line in 1966. The manner in which Monsanto consumes electricity to produce
phosphorous remains unchanged. PacifiCorp's transmission and generation facilities that
have historically served the Monsanto load appear substantially unchanged since the last
contract was approved. PacifiCorp essentially proposes fundamental change in how it
wishes to conduct business by eliminating long-term special contracts at a known and
certain price and shifting these risks to the customers. It appears PacifiCorp’s new-stated
policy is to eliminate all long-term interruptible contracts in favor of tariff based rates.
This is an effort to solve cost allocation problems that were well known and expressly
assumed by PacifiCorp stockholders at the time of the 1988 and 1999 mergers. This case
presents neither the right time or place to address those problems of PacifiCorp,
particularly since PacifiCorp has initiated the Multi-State Process specifically to a cost
allocation and many other related issues.
Q WHAT IS THE BASIS OF YOUR STATEMENT THAT PACIFICORP WANTS
TO ELIMINATE ALL LONG-TERM INTERRUPTIBLE CONTRACTS?
A In Docket PAC-E-00-06 (“SRP” Case) in response to IPUC Data Request No. 1.26, the
Company stated:
PacifiCorp intends to enter into no more long-term interruptible
service contracts. Rather, when market conditions justify such a
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course, the company will purchase capacity or energy from
customers that can provide those products by load curtailment
designed on a short-term basis to meet specific needs.
A further response in IPUC Data Request No. 1.27 also expands on their response:
As indicated in Data Response 1.26, the Company, with or without
SRP, intends to discontinue the practice of offering interruptible
service as a retail purchase option. Customers will be provided
firm service at tariff or tariff-equivalent pricing.
Q WHAT FUNDAMENTAL PROBLEM DO YOU HAVE WITH PACIFICORP’S
PROPOSAL TO INCREASE MONSANTO’S EXISTING RATE OF $18.5 TO $31.4
PER MWH?
A PacifiCorp’s proposal to increase Monsanto’s rate to $31.4 per MWH results in a 70%
increase! Monsanto’s Soda Springs plant would be in a death spiral in my opinion. In
addition, this would cause rate shock and appears contrary to the principle of gradualism.
This substantial increase to Monsanto should be contrasted with rates of other
PacifiCorp customers which have been relatively stable as reflected by PacifiCorp
exhibits presented in the Multi-State Process case, Exhibit 207.
Q ARE YOU AWARE OF OTHER INDUSTRIAL CUSTOMERS OF PACIFICORP
THAT HAVE EXPERIENCED SIMILAR DIFFICULTIES IN NEGOTIATING A
NEW SPECIAL CONTRACT?
A Yes. Magnesium Corporation of America (“Magcorp”) and Geneva Steel Corporation
(“Geneva”) in Utah faced a similar situation. Neither was able to agree to new special
contract terms proposed by PacifiCorp. Both took their disputes to the Utah PSC for
resolution.
Testimony of James R. Smith - Page 24
Q HOW DID MAGCORP SECURE NEW SPECIAL CONTRACT TERMS? 1
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A In Docket No. 01-035-38, Magcorp requested that the Utah Public Service Commission
establish the rate, term, interruptibility and buy-through provisions to be included in a
Special Contract.
Q WHAT WAS THE RESULT OF THE MAGCORP CASE IN UTAH?
A Exhibit 208 is two Orders in the Magcorp case entered on May 24, 2002, and on July 2,
2002, by the Utah Commission. By these Orders the Utah Commission: (1) established a
single interruptible contract for Magcorp; (2) established a rate of $21 per MWH; (3) set
the contract term through 12/31/2004; (4) defined interruption terms of up to 6 hours/day
Monday through Friday during summer peaks; (5) required 2 hours advance notice of
interruptions; (6) provided Magcorp a right to buy through interruptions based on a
published index; and (7) deferred interjurisdictional allocation issues to the Multi-State
Proceedings.
These decisions should be used as a precedent for the Commission to adopt a
single interruptible contract, establishing a contract term, defining interruptibility and
defer interjurisdictional issues to the Multi-State Proceedings.
Q WHAT IS THE STATUS OF GENEVA’S SPECIAL CONTRACT DISPUTE?
A Geneva has filed an Application with the Utah Commission, Docket No. 02-035-05,
seeking to establish interruptible contract terms. Geneva’s Application is attached as
Exhibit 209, with an expedited hearing requested in August, 2002.
Testimony of James R. Smith - Page 25
Q HOW DOES MONSANTO’S CURTAILMENT PROPOSAL DIFFER AND OFFER
GREATER FLEXIBILITY AND BENEFIT TO THE PACIFICORP SYSTEM?
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A Monsanto’s curtailment proposal is detailed in the testimony of Daniel R. Schettler. Our
curtailment proposal is unique when compared to Magcorp or any other large industrial
load. This is because of the size of the curtailment, the fact that it can be utilized in
incremental blocks ranging from 46 MW to 166 MW, and because Monsanto can be
curtailed almost instantaneously, upon little advance notice. Magcorp, like most other
industrial customers, has operational constraints requiring two hours advance notice
before shutdown.
Q PLEASE DESCRIBE THE PRICING METHODS PROPOSED BY PACIFICORP
AND ADOPTED BY THE COMMISSION FOR THE MOST RECENT 1992 AND
1995 CONTRACTS.
A Monsanto’s previous special contracts have been priced based upon a rate that would
pay PacifiCorp’s variable energy costs plus make a reasonable contribution to fixed costs.
The Commission has repeatedly accepted this as the appropriate method for pricing
electric service to Monsanto. When the Commission approved the 1992 Contract on
Order No. 24220 the following finding was made at p. 5:
The rates for interruptible service, set forth in the Agreement, will
cover UP&L’s variable energy costs, transmission costs and make a
contribution to fixed costs over the term of the contract.
***
Based upon the foregoing, we hereby find that the rates for both
interruptible and firm service set forth in the Power Supply Agreement
are fair, just and reasonable.
Testimony of James R. Smith - Page 26
Similarly, when the 1995 Contract was approved in Order No. 26282, the Commission
found “fair, just and reasonable” the new contract which provided both firm and
interruptible service, with interruptible service priced based on an amount which covered
variable costs and made a reasonable contribution to fixed costs.
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Q HAVE THE NON-FIRM REVENUES FROM MONSANTO’S SPECIAL
CONTRACTS BEEN INCLUDED IN PACIFICORP’S COST-OF-SERVICE
STUDIES FOR IDAHO JURISDICTIONAL CUSTOMERS?
A No. Monsanto’s non-firm load has always been treated as a system customer of
PacifiCorp and its predecessor, Utah Power. This is in recognition of the substantial
benefits Monsanto interruptible provides to the entire system in the form of load
balancing and operating reserves. Accordingly, non-firm revenues and costs from the
Special Contract are not allocated directly to the Idaho jurisdiction. The revenues
collected from the non-firm service are treated as revenue credits and are used to offset
the revenue requirements for all firm customers.
Q HOW DOES MONSANTO PROPOSE THE COMMISSION RESOLVE THE
CONTRACT DISPUTE WITH PACIFICORP?
A Monsanto respectfully requests that the Commission establish the rate Monsanto should
pay for firm and interruptible service under a single integrated special contract, that the
term of the contract be established and that interruption rights be defined. The exact
proposal of Monsanto on each of these issues is set forth in the testimony of Daniel R.
Schettler. Monsanto does not believe it is necessary or appropriate for the Commission to
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change Monsanto’s current status as a system customer for cost and revenue allocation
purposes. PacifiCorp has chosen to address those issues in the Multi-State Process case
which is the proper forum.
Q DOES THIS CONCLUDE YOUR TESTIMONY?
A Yes.