HomeMy WebLinkAboutDirect Testimony of Kathryn Iverson.pdfBefore the
Public Utilities Commission
of the State of Idaho
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 )
Direct Testimony of
Kathryn E. Iverson
On Behalf of
Monsanto Company
July 2002
Project 7402
PACIFICORP
Before the
Public Utilities Commission
of the State of Idaho
CASE NO. PAC-E-01-16
Table of Contents to the
Direct Testimony of Kathryn E. Iverson
I. INTRODUCTION AND QUALIFICATIONS....................................................................1
II. PURPOSE OF TESTIMONY AND SUMMARY OF CONCLUSIONS............................2
III. BACKGROUND ON THE TREATMENT OF MONSANTO
IN COST OF SERVICE STUDIES.............................................................................5
IV. MODIFICATIONS TO PACIFICORP’S SITUS COST STUDY ......................................9
V. COST ALLOCATION STUDY TREATING MONSANTO
AS AN INTERRUPTIBLE CUSTOMER..................................................................21
Appendix A
Exhibits:
Exhibit 216 (KEI-1) – Impact on Idaho Return with Additional Monsanto Revenues
Exhibit 217 (KEI-2) – Results of Alternative Cost Studies -- Firm
Exhibit 218 (KEI-3) – Administrative and General Expenses
Exhibit 219 (KEI-4) – Results of Alternative Cost Studies – Interruptible
Exhibit 220 (KEI-5) – Hold Harmless Analysis
PACIFICORP
Before the
Public Utilities Commission
of the State of Idaho
CASE NO. PAC-E-01-16
Direct Testimony of Kathryn E. Iverson
I. INTRODUCTION AND QUALIFICATIONS 1
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Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A My name is Kathryn E. Iverson; 5555 DTC Parkway, Suite B-2000; Greenwood
Village, Colorado 80111.
Q WHAT IS YOUR OCCUPATION AND BY WHOM ARE YOU EMPLOYED?
A I am a consultant in the field of public utility regulation and employed by the firm of
Brubaker & Associates, Inc. (BAI), regulatory and economic consultants with
corporate headquarters in St. Louis, Missouri.
Q WOULD YOU PLEASE STATE YOUR EDUCATIONAL BACKGROUND AND
EXPERIENCE?
A I have a Bachelor of Science Degree in Agricultural Sciences and a Master of
Science Degree in Economics from Colorado State University. I have been a
consultant in this field since 1984, with experience in utility resource matters, cost
allocation and rate design. More details are provided in Appendix A to this testimony.
Testimony of Kathryn E. Iverson – Page 1
Q ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS PROCEEDING? 1
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A I am testifying on behalf of Monsanto Company, along with my colleague, Dr.
Rosenberg.
II. PURPOSE OF TESTIMONY AND SUMMARY OF CONCLUSIONS 4
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Q WHAT SUBJECTS DO YOU AND DR. ROSENBERG ADDRESS?
A Dr. Rosenberg and I have been asked to review PacifiCorp’s rationale and support for
the offered special contract price, terms and conditions for service to Monsanto’s
Soda Springs facility. We will make recommendations to the Idaho Public Utilities
Commission (“Commission”) on a reasonable contract price for serving Monsanto.
Q WHAT SPECIFIC AREAS DOES YOUR TESTIMONY COVER?
A My testimony provides the analysis to quantify the cost of service studies used in the
development of the special contract rate. Specifically, I provide testimony on the
quantification of the allocation of jurisdictional costs and class cost of service studies
used as one input to the design of the Monsanto rate. Dr. Rosenberg’s testimony
provides a policy framework for the Commission to evaluate the proposed rates,
terms and conditions for service to Monsanto.
Q ARE YOU SPONSORING ANY EXHIBITS IN CONNECTION WITH YOUR
TESTIMONY?
A Yes. I am sponsoring Exhibits 216 (KEI-1) through 220 (KEI-5). These exhibits were
prepared either by me or under my supervision and direction.
Testimony of Kathryn E. Iverson – Page 2
Q WHAT PRICE DOES PACIFICORP PROPOSE TO CHARGE MONSANTO FOR
SERVICE?
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A The Company has separated its proposal into two contractual arrangements. The
first contract is for PacifiCorp to sell firm energy to Monsanto at an overall average
price of $31.4 per MWH. PacifiCorp’s proposed rate design includes seasonal and
hourly price differentials, with both capacity and energy prices. The second contract
is for PacifiCorp to buy interruptible energy from Monsanto as needed. Despite
PacifiCorp’s testimony that the net effect of these two separate contracts is a cost of
$27 to $28 per MWH, the actual net cost is indeterminate since the second contract’s
quantity, price and timing are all unknown.
Q WOULD YOU PLEASE SUMMARIZE YOUR FINDINGS AND CONCLUSIONS?
A My testimony examines the allocated costs for Monsanto under three different types
of analysis, or treatments. The first treatment follows the proposal of the Company
whereby the firm price is derived for Monsanto, and then a separate valuation of
interruptibility is determined and netted with the firm price to come up with the overall
interruptible cost of service. With my revisions to the cost study as filed by the
Company, the cost of firm power to Monsanto is determined to be in the range of
$26.1 to $28.1 per MWH.
The second treatment explicitly recognizes that Monsanto is taking a lower
quality service in the allocation and assignment of costs. Under this alternative, the
overall price for providing interruptible service is derived as ranging from $19.6 to
$20.9 per MWH based on cost allocation studies recognizing 50% of Monsanto’s non-
firm demands in the allocation factors.
The third treatment provides a “hold harmless” analysis that maintains the
other Idaho ratepayers at status quo levels. This approach yields an interruptible rate
Testimony of Kathryn E. Iverson – Page 3
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for service to Monsanto of $21.7 per MWH under the Company’s cost study, and
even less under alternative cost studies. Dr. Rosenberg incorporates these results
together with a valuation of interruptibility and arrives at an overall price of $19.4 per
MWH for service to Monsanto, an increase of almost $1 per MWH above the current
rate, or roughly a 5% increase.
Q WHY DO YOU BELIEVE IT IS NECESSARY TO ANALYZE MONSANTO’S COSTS
UNDER THESE THREE DIFFERENT TYPES OF TREATMENTS?
A There is considerable dispute about how to best model and recognize interruptible
loads on PacifiCorp’s system. While PacifiCorp chose to only provide a single view of
the allocation of costs to interruptible customers (i.e., treat Monsanto as a firm
customer), we offer a more complete picture before this Commission by providing
alternative treatments. To the extent these treatments all point to a relatively narrow
range of pricing provisions, the Commission is provided increased confidence in its
determination of a reasonably accurate overall view of the Company’s cost of serving
the Monsanto Soda Springs load.
Q IS A COST OF SERVICE APPROACH THE ONLY WAY TO ASCERTAIN THE
COST TO SERVE AN INTERRUPTIBLE CUSTOMER SUCH AS MONSANTO?
A No. We are presenting these alternative cost of service studies only in response to
the new proposal of PacifiCorp to allocate embedded costs to Monsanto. If the
Commission agrees with PacifiCorp’s approach for deriving a firm price for Monsanto,
then our testimony will provide additional perspectives on cost allocation. Dr.
Rosenberg will suggest further pricing methods ranging from examination of other
interruptible contracts to an average variable cost plus an adder. The cost studies I
employ in my testimony are but one way of reviewing the costs to serve Monsanto.
Testimony of Kathryn E. Iverson – Page 4
Q HOW IS YOUR TESTIMONY ORGANIZED? 1
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A My testimony will first discuss the allocation of costs to Monsanto as a firm customer
with revisions to the Company cost study for five items. Second, my testimony will
provide the allocation of costs continuing the treatment as Monsanto as an
interruptible customer. Third, I will present the “hold harmless” analysis which seeks
to keep the revenue requirement allocated to the non-Monsanto Idaho customers at
their present revenue levels, thus holding all other Idaho customers indifferent to the
change in status of Monsanto from “system” to “situs”.
III. BACKGROUND ON THE
TREATMENT OF MONSANTO IN COST STUDIES
Q DOES PACIFICORP PROVIDE FIRM SERVICE TO MONSANTO? 9
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A No. Monsanto’s load is interruptible1, and PacifiCorp has treated the load as such in
its resource planning. Even though Monsanto is primarily an interruptible customer,
PacifiCorp proposes that Monsanto be served at a so-called firm rate of $31.4 per
MWH.2 My testimony rebuts the Company’s figures.
Q HAS PACIFICORP FILED A COST OF SERVICE STUDY TO SUPPORT ITS FIRM
PRICE TO MONSANTO?
A Yes. PacifiCorp filed three studies in support of its firm price:
1 With the exception of 9 MW firm for safety concerns.
2 Actually the contract terms offered by PacifiCorp are not entirely firm as the contract
provides for PacifiCorp to temporarily interrupt or curtail service of power for emergency purposes.
See the testimony of Alan Rosenberg for further details.
Testimony of Kathryn E. Iverson – Page 5
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1. Jurisdictional Allocation Model (JAM) with “System” Treatment of Monsanto
2. Jurisdictional Allocation Model (JAM) with “Situs” Treatment of Monsanto
3. Idaho Class Cost of Service (COS) Study
All three of these cost studies employ the same general cost of service methodology
whereby the demand allocator for generation and transmission costs is a combination
of 75% demand-related and 25% energy-related. The demand portion is allocated on
a 12 coincident peak (12 CP) method, while the energy portion is allocated on the
basis of energy at generation level. Consequently, all three Company studies are
based solely upon the “12 CP; 75/25” allocation methodology, and are but one
perspective for use in designing rates for Monsanto.
Q WHY ARE THERE TWO JAM COST STUDIES?
A PacifiCorp provided two different JAM cost studies based on two different treatments
for handling special contracts.
The first JAM study with “system” treatment of Monsanto’s special contract
employs the historical method for dealing with special contracts by excluding special
contract usage in the jurisdictional allocation study. Special contracts are not
allocated costs; rather, their revenues are spread to all jurisdictions as an offset to
costs for all the other non-contract customers.
PacifiCorp proposes to depart from this “system” practice and instead directly
allocate the costs of serving Monsanto to the Idaho jurisdiction for ratemaking
purposes. The second JAM study employs the proposed new practice for “situs”
treatment. The Idaho jurisdictional results from the “situs” JAM study are then
incorporated in the Idaho COS for determining the allocated costs to Monsanto.
Testimony of Kathryn E. Iverson – Page 6
Q DOES THE USE OF “SITUS” COST STUDIES IN THIS PROCEEDING MEAN
THAT YOU ACCEPT THE CHANGE IN ALLOCATION TREATMENT FROM
“SYSTEM” TO “SITUS”?
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A No. The use of any “situs” cost studies in this proceeding is only meant to provide
one type of analytical tool for pricing the cost to serve Monsanto. The broader policy
question of how to treat special contracts by the various Commissions which regulate
PacifiCorp is currently under investigation in the Multi-State Process (MSP) and has
been addressed by Monsanto witness Richard Anderson.
Q WHAT ARE THE RESULTS OF PACIFICORP’S IDAHO COS PRESENTED IN
THEIR EXHIBIT 1?
A The COS by rate schedule presented by the Company shows that Monsanto’s
present revenues provide a return on rate base of negative 5.55%.3 A negative rate
of return for Monsanto is not surprising however. The present revenues for Monsanto
are for interruptible service, while the Company’s COS is designed to determine the
total cost of
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firm service. Comparing present interruptible revenues to a proposed
firm revenue requirement is an apples and oranges comparison. Thus, it is not
surprising that Monsanto’s return under the COS is negative.
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Second, the Company’s COS seems to imply an increase of 70% is necessary
for Monsanto. While a cost study does provide a guiding light for setting rates, the
Company has taken its own particular cost study results as gospel for proposed rates.
PacifiCorp makes no allowances for any other input such as gradualism or rate
shock. Dr. Rosenberg will discuss the need for these additional considerations.
3 Exhibit No. 1, D. Taylor, PacifiCorp, Page 1, column E, line 11.
Testimony of Kathryn E. Iverson – Page 7
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Third, the Company’s COS provides a basis for the variable costs associated
with serving Monsanto. In other words, we can review the allocated costs to
Monsanto that vary on the basis of usage without any contribution to fixed costs.
Q WHAT ARE THE VARIABLE COSTS TO SERVE MONSANTO?
A Based on the Company’s COS, the variable cost to serve Monsanto is $14 per MWH.
This variable cost is based on the generation expenses plus transmission wheeling
by others, net of the sales for resale allocated to Monsanto, as shown below:
TABLE 1
Monsanto Average Variable Cost
Amount
Total Production Expense $45,929,191
Transmission by Others $1,778,074
Total Variable Costs $47,707,265
Sales for Resale ($28,127,522)
Net Variable Costs $19,579,743
Monsanto Energy Usage (MWH) 1,400,846
Average Variable Cost ($ per MWH) $14.00
At the current contract price of $18.50 per MWH, the contribution to fixed costs is
$4.50 per MWH, or $6.3 million. Dr. Rosenberg discusses how the above variable
cost with an appropriate fixed cost adder can lead to a reasonable rate for the new
contract.
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Testimony of Kathryn E. Iverson – Page 8
IV. MODIFICATIONS TO PACIFICORP’S SITUS COST STUDY 1
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Q WHAT MODIFICATIONS HAVE YOU MADE TO THE JURISDICTIONAL AND
IDAHO COST STUDIES PROVIDED BY PACIFICORP?
A I have made five modifications to the Company’s studies:
Correction of the rate of return applied to Monsanto;
Modification of the 75% demand/25% energy combination for the allocation of
production and transmission demand-related expenses and rate base, to a
100% demand/0% energy;
Use of an 8 CP demand allocator, rather than 12 CP;
Adjustment for administrative and general (A&G) expenses allocated to
Monsanto;
Incorporation of fuel shaping in the overall allocation of fuel and purchased
power costs.
I will explain why each of these modifications are appropriate and necessary.
Furthermore, I should note that I have not made any explicit disallowances or
exclusions to the full costs and investment contained in the Company’s cost studies.
Rate of Return 17
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Q WHAT RATE OF RETURN DOES PACIFICORP USE AS THE BASIS OF THE
PROPOSED FIRM MONSANTO RATE?
A PacifiCorp proposes a rate of return of 8.418% to be applied to Monsanto. According
to the Company’s testimony, the 8.418% rate of return was selected to match the
1999 normalized rate of return for the state of Idaho, prior to the inclusion of
Monsanto as a “situs” customer. In other words, the Company uses the JAM
“system” study to determine the rate of return to apply to Monsanto.
Testimony of Kathryn E. Iverson – Page 9
Q PACIFICORP CLAIMS THAT PRICING THE MONSANTO CONTRACT AT THE
8.418% RATE OF RETURN (9.8% RETURN ON EQUITY) WILL LEAVE THE
RETURN FOR THE STATE OF IDAHO UNCHANGED. DO YOU AGREE?
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A No. If PacifiCorp’s proposed increase to Monsanto is granted, then the Idaho
jurisdiction rate of return will increase to 8.867%. This is shown in Exhibit 216 (KEI-
1), page 1, line 10. Contrary to the Company’s claims, an increase of $18 million to
Monsanto, combined with the present revenues of all other Idaho customer classes,
will afford PacifiCorp an increase in its Idaho return.
Q WHY IS THE IDAHO JURISDICTIONAL RATE OF RETURN HIGHER WITH
PACIFICORP’S PROPOSED $18 MILLION INCREASE TO MONSANTO?
A As summarized in Table 2 below, an overall total increase of $15 million for Idaho is
necessary to return the state of Idaho rate of return back to 8.418% under the
Company’s proposed cost study.
TABLE 2
PacifiCorp Cost of Service by Rate Schedule
Present
Revenue
Increase
(Decrease) to
Equal ROR
Percentage
Change
Residential $ 43,205,288 $ (8,484,280) -19.6%
General Service 27,006,334 (3,161,812) -11.7%
Irrigation 25,800,073 8,704,210 33.7%
Other 5,989,999 (8,738) -0.1%
Monsanto 25,891,534 18,079,556 69.8%
Total $ 127,893,229 $ 15,128,936 11.8%
Source: Exhibit No. 1, D. Taylor, Page 1 of 4.
Testimony of Kathryn E. Iverson – Page 10
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Even though PacifiCorp’s own cost study shows that it requires $15 million to bring its
rate of return back to 8.418% for the state of Idaho, PacifiCorp proposes to increase
Monsanto’s rates by over $18 million. The difference – close to $3 million – is
pocketed by PacifiCorp since the Company has no intention of revising any other
classes’ rates in this proceeding. Consequently, as a result of increasing Monsanto’s
rates the overall rate of return generated for PacifiCorp will actually be higher than
8.418%.
Q WHAT RATE OF RETURN SHOULD BE USED IN DETERMINING THE INCREASE
TO MONSANTO?
A The increase to Monsanto should be limited to the overall increase necessary to bring
the Idaho jurisdiction rate of return back to the level prior to including Monsanto as a
“situs” customer. For example, with PacifiCorp’s as filed study (which I have referred
to as Study “A” in my exhibit), the increase to Monsanto is limited to the overall
$15,128,936 jurisdictional increase, which returns the overall Idaho jurisdictional
return back to 8.418%. This is shown on page 2 of Exhibit 216. Under this return
methodology, neither PacifiCorp or the other Idaho ratepayers are impacted as a
result of moving toward “situs” treatment for Monsanto. Limiting Monsanto’s increase
to the $15.1 million amount results in a firm cost of $29.3 per MWH, and a rate of
return of 6.88% for Monsanto, a significant increase from the present return of
negative 5.55% return shown by PacifiCorp. Furthermore, the return for the state of
Idaho is maintained at its 8.418% level, as the Company mistakenly believed its own
method was doing.
Testimony of Kathryn E. Iverson – Page 11
Classification of Generation and Transmission Costs 1
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Q HOW ARE GENERATION AND TRANSMISSION COSTS CLASSIFIED IN THE
COMPANY’S JURISIDCTIONAL AND IDAHO COST STUDIES?
A PacifiCorp classifies generation and transmission costs as 75% demand related and
25% energy related.4
Q HAS THE IDAHO COMMISSION PROVIDED ANY GUIDANCE ON THIS ISSUE IN
THE PAST?
A Yes. In the last Utah Power & Light (UPL) cost of service case, Case No. UPL-E-90-
1, the Commission provided guidance on the use of cost studies, in particular the
issue of the classification and allocation of generation and transmission costs. Order
No. 23508 details the Commission’s review of eight different cost-of-service
methodologies presented by UPL in the 1990 proceeding. One study used the
combination of 25% energy and 75% 12 CP, similar to the study as proposed by the
Company in this docket. The Commission in Order No. 23508, though, dismissed the
25% energy/75% demand methodology, and instead opted for studies with 100%
demand classification.
Q DO YOU AGREE THAT THE COST STUDY SHOULD USE THE 100% DEMAND
CLASSIFICATION?
A Yes. By allocating 100% of the generation and transmission demand-related rate
base and expenses on the basis of coincident peak demands, all firm customers will
receive equal shares of the cost of constructing the investment on a per kW basis. All
customers then will share proportionately in the cost of the generation and
transmission investments based on their contribution to the monthly coincident peak
4 See Direct Testimony, David L. Taylor, page 12.
Testimony of Kathryn E. Iverson – Page 12
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demands. Clearly the investments for generation and transmission are fixed costs,
and so should be allocated on the basis of demand.
Q HAVE YOU RERUN THE COMPANY’S COST STUDIES WITH THE DEMAND
ALLOCATOR SET AT 100/0 RATHER THAN PACIFICORP’S 75/25?
A Yes. I have rerun both JAM studies (“system” and “situs”) at 100% demand, as well
as the Idaho COS, continuing to use the 12 CP as proposed by PacifiCorp. The
resulting price is shown in Exhibit 217 (KEI-2), labeled as Study “B”. Running the
JAM “system” study shows that the Idaho jurisdiction has a rate of return of 8.49%,
and when the “situs” study is run the rate of return drops to 6.31%. In order to bring
the Idaho jurisdiction back up to the 8.49% return requires an overall increase of
$14.1 million. If Monsanto’s revenues are increased by $14.1 million, their overall
firm rate is $28.50 per MWH. Monsanto’s return increases from negative 5.02% to
positive 6.99%.
Q DID THE COMMISSION FIND THE 12 CP METHOD THE ONLY DEMAND
METHOD IN ITS 1990 ORDER?
A No. The Commission found the use of an 8 CP method equally compelling for use in
guidance of establishing rates:
We further find that both the 8 CP and 12 CP methods of allocating
generation and transmission costs possess advantages as well as
shortcomings. As an effort to capture the advantages of both methods
we will use, an average of the Company’s 8 CP and 12 CP methods
for guidance in this case. (Order No. 23508, page 9)
Q WHY DO REGULATORS CONSIDER MULTIPLE COINCIDENT PEAKS (SUCH AS
12 CP OR 8 CP) WHEN EVALUATING COST OF SERVICE STUDIES?
Testimony of Kathryn E. Iverson – Page 13
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A A system that is built to accommodate the single highest peak during the year can
also satisfy the other subordinate monthly peaks. Nevertheless, it is fairly common to
use multiple peaks (usually anywhere from two months (e.g., winter and summer) to
12 months) in a cost analysis to account for the fact that the annual peak does not
always occur in the same month every year. The use of a single CP can also
produce erratic results, as the Commission noted in its 1990 order. Consequently,
using several coincident peaks is generally considered a fairer way to allocate costs.
Q WHAT FACTORS GO INTO THE CHOICE OF THE NUMBER OF PEAKS?
A While there are no hard and fast rules that garner universal acceptance, in general
the flatter the monthly peaks, the more one can justify the 12 CP method.
Conversely, the more pronounced the monthly peaks become, the more a cost
analyst would opt for fewer peaks. Using more coincident peaks than is warranted,
dilutes the message that an electric system must be designed to meet the peak load.
Using more coincident peaks than can be justified also penalizes high load factor
customers, the most efficient users of the system. Thus, the cost analyst seeks to
strike a balance – use enough peaks to accurately capture the responsibility of all
usage that may contribute to an annual peak, but not enough to distort the influence
that peak usage has on cost causation.
Q WHAT IS YOUR OPINION ON THE RELATIVE MERITS OF USING 12
COINCIDENT PEAKS VERSUS USING 8 COINCIDENT PEAKS?
A Before I can properly answer that question, we must first distinguish between the JAM
model and the Idaho COS model. The reason we must distinguish between the two
is that: (1) the PacifiCorp system load shape is quite different from the Idaho
jurisdiction load shape, and (2) the two models serve different purposes. The JAM
Testimony of Kathryn E. Iverson – Page 14
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study is used to allocate costs among broad jurisdictions (California, Oregon,
Washington, Utah, Wyoming and Idaho), while the Idaho COS model concerns itself
strictly with allocation among the Idaho retail classes.
Q WHAT IS YOUR OPINION ON THE RELATIVE MERITS OF USING 12
COINCIDENT PEAKS VERSUS USING 8 COINCIDENT PEAKS IN THE JAM
STUDY?
A In my opinion, the 8 CP method is preferable to the 12 CP method. I say that
because in the test year (1999), the four lowest peaks were all between 80% and
84% of the annual peak, while the 8 highest peaks average 93% of the annual peak,
as shown in the following figure (PacifiCorp’s monthly peaks shown in the lighter
shade of gray):
FIGURE 1
Monthly Peak Demands as a
Percent of the Annual System Peaks for PacifiCorp and Idaho
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
PacifiCorp Idaho
Testimony of Kathryn E. Iverson – Page 15
Q WHAT IS YOUR OPINION ON THE RELATIVE MERITS OF USING 12
COINCIDENT PEAKS VERUS USING 8 COINCIDENT PEAKS IN THE IDAHO COS
STUDY?
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A In the Idaho COS study, the 8 CP method is even more justified than in the JAM
study. As shown in Figure 1 above for Idaho (the darker shaded bars), only two
months out of twelve exhibited peak demands that were within 87% of the annual
Idaho peak. The lowest four monthly peaks average only 58% of the annual peak.
Not only is the 8 CP method even more justified in the Idaho COS study, it is also
more critical. To the extent that the load factor of Idaho, let us say, is similar to that of
Wyoming, it will not make too much difference to the outcome whether you use 8 CP
or 12 CP in the JAM study. However, retail customer classes almost always exhibit
much sharper differences in load shape among each other, than do the load shapes
from one state to another. Thus it is much more important to limit the number of
coincident peaks used in the Idaho COS study. I recommend that the Commission
focus on the 8 CP method for both the JAM as well as the Idaho COS studies.
Q HAVE YOU RERUN THE COMPANY’S COST STUDIES USING AN 8 CP
ALLOCATOR?
A Yes, I have. The results are labeled as Study “C” and presented on Exhibit 217.
Running the JAM “system” study shows that the Idaho jurisdiction has a rate of return
of 7.73%, and when the “situs” study is run the rate of return drops to 6.03%. In order
to bring the Idaho jurisdiction back up to the 7.73% return requires an increase of
$11.3 million. If Monsanto’s revenues are increased by $11.3 million, their overall
firm rate is $26.50 per MWH.
Testimony of Kathryn E. Iverson – Page 16
Q WHAT IS THE RESULT OF AVERAGING THE RESULTS OF THE 12 CP STUDY
AND THE 8 CP STUDY?
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A The results of averaging Study “B” and Study “C” are shown on Exhibit 217. The firm
price to Monsanto would be $27.50 per MWH, which equates to an increase of 49%
or $12.7 million.
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Q WHAT ARE THE ALLOCATED COSTS TO MONSANTO FOR A&G EXPENSES IN
THE COMPANY’S COST STUDY?
A Under the Idaho COS proposed by PacifiCorp, the total A&G expenses allocated to
Monsanto are $4.1 million, or $2.95 per MWH, as shown in Exhibit 218 (KEI-3). It
makes up over 9% of the total proposed cost of firm power. For example, under
PacifiCorp’s cost study, $914,889 of “Office Supplies and Expenses” are allocated to
Monsanto alone. A&G salaries allocated to Monsanto are over $1.8 million.
Q DOES PACIFICORP CONSIDER $4 MILLION TO BE HIGH FOR A SINGLE
CUSTOMER’S SHARE OF A&G?
A While the Company has not commented directly on Monsanto’s share of A&G
expenses, PacifiCorp has recently commented on another large industrial customer’s
share. In a recent case in Utah (Docket No. 01-035-38), Magcorp noted that its share
of these costs totaled over $1 million or $1.73 per MWH. This is 40% lower than
Monsanto’s A&G expenses. While PacifiCorp agreed that $1 million “is a very large
number” for a single customer, the Company dismissed Magcorp’s concern with the
insistence that its A&G allocation was “consistent with the allocation methodology the
Testimony of Kathryn E. Iverson – Page 17
(Utah) Commission has adopted for A&G expenses”.5 Obviously, Monsanto’s share
of A&G expenses is even higher than the amount PacifiCorp allocated to Magcorp.
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Q WHY IS THE ALLOCATION TO MONSANTO SO HIGH FOR THESE OVERHEAD
TYPE OF EXPENSES?
A As explained by the Company, most A&G costs are functionalized and allocated to
classes based on generation, transmission and distribution plant. Thus, a customer
such as Monsanto which uses a large amount of energy and is allocated significant
amounts of generation plant in the Company’s cost study will likewise be allocated a
large amount of A&G expenses.
Q DO YOU HAVE AN ALTERNATIVE METHOD OF ALLOCATING A&G EXPENSES?
A Yes. Instead of relying on functionalization based on plant, the following accounts of
the A&G expenses should be functionalized on the basis of labor costs:
Account 920 A&G Salaries
Account 921 Office Supplies
Account 923 Outside Services
Account 926 Employee Pensions
I have rerun the Studies A, B and C using the labor allocations. As a result of the
previous changes, the firm price for Monsanto should be reduced another $0.32 per
MWH.
5 Before the Public Service Commission of Utah, Docket No. 01-35-38, Direct Testimony of David
Taylor, page 9.
Testimony of Kathryn E. Iverson – Page 18
Shaping Fuel Costs for Recognition of High Load and Low Load Hours 1
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Q DOES PACIFICORP PROVIDE ANY RECOGNITION OF HIGH LOAD AND LOW
LOAD HOURS IN ITS COST STUDY ALLOCATION OF FUEL AND ENERGY-
RELATED PURCHASED POWER EXPENSES?
A No. The costs of fuel and energy-related purchases are spread to all 8,760 hours of
the year equally.
Q IS THAT ALLOCATION CONSISTENT WITH THE COMPANY’S PROPOSED RATE
DESIGN, OR PLANNING ASSUMPTIONS?
A No, it is not. The Company proposes a rate design to Monsanto which differentiates
between high load and low load energy in the summer and winter seasons as follows:
TABLE 3
Seasonal Price Differentiation
High Load Hours Low Load Hours
Summer: May – October
20% premium 10% discount
Winter: November – April
0% premium 10% discount
Definition: On Peak Hours:
7:00 AM to 10:00 PM,
Monday through Friday,
except holidays
Off-Peak Hours:
All other times
The Company’s planning assumptions include similar types of premiums and
discounts for high load and low load hours.
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6 PacifiCorp Resource and Market Planning Program, RAMPP-6, Appendix: Model Output,
Tab 3, June 2001
Testimony of Kathryn E. Iverson – Page 19
Q WHAT IS THE IMPACT OF RECOGNIZING THE TIME DIFFERENTIATION OF
FUEL AND PURCHASED ENERGY COSTS?
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A I have analyzed the load shapes of the Idaho jurisdiction for the test period 1999 for
Monsanto’s loads, and all other Idaho load. When the premiums and discounts
suggested by PacifiCorp are incorporated into the energy allocation process,
Monsanto’s average price declines by $0.12 per MWH. This adjustment thus
recognizes the load shape of Monsanto and incorporates an allocation of energy-
related costs reflective of the premiums and discounts preferred by the Company.
Summary of Cost Allocation Studies 10
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Q PLEASE SUMMARIZE THE RESULTS OF YOUR COST STUDIES AND
MODIFICATIONS.
A Table 4 summarizes the results of the cost studies with the treatment of Monsanto as
a firm customer:
TABLE 4
Summary of Cost Study and Adjustments
With Monsanto As A Firm Customer
($ per MWH)
Cost
Study
Results
A&G
Adjustment
Shaping
Fuel Cost
Adjustment
Firm
Monsanto
Rate
Study “A”:
12 CP; 75/25
$29.3 (0.32) (0.12) $28.9
Study “B”:
12 CP; 100/0
$28.5 (0.32) (0.12) $28.1
Study “C”:
8 CP; 100/0
$26.5 (0.32) (0.12) $26.1
Average of “B” and “C”
$27.5 (0.32) (0.12) $27.1
Testimony of Kathryn E. Iverson – Page 20
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While PacifiCorp’s singular cost study indicates a firm price of $31.4 per MWH, the
other various cost studies point toward a firm price in the range of $26 to $28 per
MWH.
V. COST ALLOCATION STUDY
TREATING MONSANTO AS AN INTERRUPTIBLE CUSTOMER
Q IN THE PREVIOUS SECTION BOTH YOU AND THE COMPANY TREATED
MONSANTO AS A FIRM CUSTOMER FOR PURPOSES OF ALLOCATING COSTS
AMONG CUSTOMER CLASSES. IS THERE ANOTHER APPROACH THAT
COULD BE USED TO ASCERTAIN THE COST TO SERVE MONSANTO AS AN
INTERRUPTIBLE CUSTOMER?
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A Yes. Rather than include all of Monsanto’s non-firm coincident peak demands in the
cost allocation study, a percentage of its non-firm demands could be used instead.
Placing 100% of Monsanto’s coincident peaks assumes that the class is to be served
as a firm customer. Alternatively, placing 0% of Monsanto’s loads in the cost studies
assumes that Monsanto would have no responsibility for payment of demand-related
expenses. Neither of these extremes truly captures the reality of the service to
Monsanto, however. The answer lies somewhere between 0% and 100%.
Q WHAT PERCENTAGE DO YOU PROPOSE TO USE?
A As explained by Dr. Rosenberg in his direct testimony, the use of a 50% factor for
interruptible loads has precedent in both Idaho and other jurisdictions.
Q HAVE YOU RERUN THE COMPANY’S COST STUDIES INCORPORATING ONLY
50% OF MONSANTO’S NON-FIRM LOAD IN THE DEMAND ALLOCATOR?
Testimony of Kathryn E. Iverson – Page 21
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A Yes. When PacifiCorp’s 12 CP 75/25 methodology is modified to include 50% of
Monsanto’s loads, the increase to Monsanto is limited to roughly $7.2 million, or an
increase of around 28%. Exhibit 219 (KEI-4) provides the price resulting from
revising Study “A” (the Company’s as filed studies) with 50% of Monsanto’s non-firm
loads, as well as the results for Study “B” and Study “C”. These studies suggest that
the interruptible price for Monsanto should be in the neighborhood of $19.6 to $20.9
per MWH. Consequently, another perspective for the Commission’s consideration is
that the Monsanto’s interruptible price could be derived with a modified cost allocation
study which incorporates 50% of the non-firm load.
Q DID YOU MODIFY ANY OF THE OTHER SPECIAL CONTRACTS IN OTHER
JURISDICTIONS BY 50% AS WELL?
A No. Since we are focusing on developing rates for Monsanto alone, the 50% demand
percentage factor is applied only to Monsanto’s peak demands. It would be
presumptuous to make changes to loads in other jurisdictions.
Q DR. ROSENBERG SUGGESTS ANOTHER WAY OF RUNNING THE COST STUDY
INCORPORATING A PERCENTAGE DIFFERENT THAN 50%. COULD YOU
PLEASE ELABORATE ON THIS ALTERNATIVE “HOLD HARMELSS”
APPROACH?
A Yes. As Dr. Rosenberg explains, the objective we sought to achieve was to hold the
remaining Idaho customers of PacifiCorp indifferent to the change in status of
Monsanto going from “system” to “situs”. The present revenue of all customers
excluding Monsanto is $102 million. Thus, we kept this $102 million revenue
requirement allocated to non-Monsanto Idaho customer the same in the COS by
solving for a percentage to be applied in both the “situs” JAM method as well as the
Testimony of Kathryn E. Iverson – Page 22
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COS study. The target rate of return in the COS was kept at the return on rate base
derived under the “system” JAM cost study.
Q WHAT IS THE RESULT OF THIS ALTERNATIVE “HOLD HARMLESS”
APPROACH?
A We found that a percentage of 34% when applied to Monsanto’s non-firm loads in
both the JAM and COS studies would keep the non-Monsanto cost of service at $102
million when using the Company’s cost study (Study “A”). Application of 34% results
in a cost of service to Monsanto for interruptible service of $30.5 million, or $21.7 per
MWH. Under this approach, the total non-Monsanto cost of service is maintained at
$102 million, while Monsanto receives an increase of 17.6% in its rates. Results for
the alternative “hold harmless” approach for Study “A” are shown on page 1 of Exhibit
220 (KEI-5), and are summarized for Studies “B” and “C” on page 2.
Q PLEASE SUMMARIZE THE RESULTS OF YOUR COST STUDIES RECOGNIZING
MONSANTO AS AN INTERRUPTIBLE CUSTOMER.
A Table 5 summarizes the results of the cost studies with the treatment of Monsanto as
an interruptible customer:
Testimony of Kathryn E. Iverson – Page 23
TABLE 5
Summary of Cost Studies
With Monsanto As An Interruptible Customer
($ per MWH)
Cost Study
Results
Using 50% of Monsanto Non-Firm Demand
Study “A”: 12 CP; 75/25
$23.6
Study “B”: 12 CP; 100/0
$20.9
Study “C”: 8 CP; 100/0
$19.6
Average of Study “B” and Study “C”
$20.2
Hold Harmless
Study “A”: 12 CP; 75/25
$21.7
Study “B”: 12 CP; 100/0
$18.6
Study “C”: 8 CP; 100/0
$18.5
Average of Study “B” and Study “C”
$18.6
Q DOES THIS CONCLUDE YOUR TESTIMONY IN THIS CASE? 1
2 A Yes.
Testimony of Kathryn E. Iverson – Page 24
Appendix A
Kathryn E. Iverson
Page 1
Qualifications of Kathryn E. Iverson
Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1
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A Kathryn E. Iverson; 5555 DTC Parkway, Suite B-2000; Englewood, Colorado 80111.
Q PLEASE STATE YOUR OCCUPATION.
A I am a consultant in the field of public utility regulation with Brubaker & Associates,
Inc., energy, economic and regulatory consultants.
Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK
EXPERIENCE.
A In 1980 I received a Bachelors of Science Degree in Agricultural Sciences from
Colorado State University, and in 1983, I received a Masters of Science Degree in
Economics from Colorado State University.
In March of 1984, I accepted a position as Rate Analyst with the consulting
firm Browne, Bortz and Coddington in Denver, Colorado. My duties included
evaluation of proposed utility projects, benefit-cost analysis of resource decisions,
cost of service studies and rate design, and analyses of transmission and substation
equipment purchases.
In February 1986, I accepted a position with Applied Economics Group, where
I was responsible for utility economic analysis including cogeneration projects,
computer modeling of power requirements for an industrial pumping facility, and
revenue impacts associated with various proposed utility tariffs. In January of 1989, I
was promoted to the position of Vice President. In this position, I assumed the
additional responsibilities of project leader on projects, including the analysis of
alternative cost recovery methods, pricing, rate design and DSM adjustment clauses,
BRUBAKER & ASSOCIATES, INC.
Appendix A
Kathryn E. Iverson
Page 2
BRUBAKER & ASSOCIATES, INC.
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and representation of a group of industrial customers on the Conservation and Least
Cost Planning Advisory Committee to Montana Power Company.
In March 1992, I accepted a position with ERG International Consultants, Inc.,
of Golden, Colorado as Senior Utility Economist. While at ERG, I was responsible for
the cost-effectiveness analysis of demand-side programs for Western Area Power
Administration customers. I also assisted in the development of a reference manual
on the process of Integrated Resource Planning including integration of supply and
demand resource, public participation, implementation of the resource plan and
elements of writing a plan. I lectured and provided instructional materials on the key
concept of life-cycle costing seminars held to provide resource planners and utility
decision-makers with a background and basic understanding of the fundamental
techniques of economic analysis. My work also included the evaluation of a marginal
cost of service study, assessment of avoided cost rates, and computer modeling
relating engineering simulation models to weather-normalized loads of schools in
California.
In November of 1994, I accepted a position with Drazen-Brubaker &
Associates, Inc. In April, 1995 the firm of Brubaker & Associates, Inc. was formed. It
includes most of the former DBA principals and Staff. Since joining this firm, I have
performed various analyses of integrated resource plans, examination of cost of
service studies and rate design, fuel cost recovery proceedings, as well as estimates
of transition costs and restructuring plans.
Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY?
A Yes. I have testified before the regulatory commissions in Colorado, Georgia,
Michigan, Montana, Texas and Wyoming.