Direct Testimony of Richard Anderson.pdf

Before 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 Provision for the Supply )
Of Electric Service to Monsanto Company )

Direct Testimony of

Richard M. Anderson

On Behalf of

Monsanto Company

July 19, 2002

energy strategies

Salt Lake City/Phoenix/Austin
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 Richard M. Anderson

I. INTRODUCTION...............................................................................................1

II. PURPOSE OF TESTIMONY.............................................................................2

III. PRICING VEHICLES: MULTIPLE CONTRACTS
VERSUS SINGLE INTEGRATED CONTRACT ...........................................3

IV. SITUS VERSUS SYSTEM RESOURCE:
TREATMENT OF THE MONSANTO CONTRACT ....................................13

V. POTENITAL CHANGE IN RESERVE
REQUIREMENTS OF WESTERN UTILITIES............................................18

VI. WESTERN POWER MARKET VOLATILITY
AND PRICE RISK ......................................................................................18

VII. OTHER CONSIDERATIONS IN THE PRICING
OF THE MONSANTO CONTRACT ...........................................................25

Appendix A

Exhibits:
Exhibit 212 (RMA-1)
Exhibit 213 (RMA-2)
Exhibit 214 (RMA-3)
Exhibit 215 (RMA-4)

I. INTRODUCTION AND QUALIFICATIONS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. Richard M. Anderson, 39 W. Market Street, Suite 200, Salt Lake City, Utah 84101.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am a principal in the firm of Energy Strategies, LLC. Energy Strategies is a
professional consulting firm offering services in the natural gas and electric arenas.
Q. PLEASE DESCRIBE BRIEFLY YOUR EDUCATIONAL BACKGROUND.
A. I received a Bachelor of Business Administration degree from the University of Texas
at Austin and a Ph.D. in Economics from the University of Utah.
Q. BRIEFLY DESCRIBE YOUR PROFESSIONAL EXPERIENCE.
A. I have approximately 20 years of work experience in the energy field. The work has
centered on economic assessments and policy development on a variety of energy
issues. I have provided direct testimony in regulatory proceedings before the Idaho,
Nevada, Oregon, Utah and Wyoming public service/utility commissions.
Appendix A is a brief resume that provides more detail as to my professional
experience.
Q. ON WHOSE BEHALF ARE YOU FILING TESTIMONY IN THIS
PROCEEDING?
A. I am filing testimony on behalf of the Monsanto Company.
II. PURPOSE OF TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 1
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A. I am providing testimony in support of the special contract terms and
provisions as advocated by the Monsanto Company. I will address the issues
of how the Monsanto load should be treated in a regulatory framework.
Specifically, the issue of whether Monsanto’s load should be priced as a firm
load or as an interruptible customer will be evaluated. I discuss the attributes
of the Monsanto load and why these attributes are of significant value to
PacifiCorp (the Company). I will also address the issue of whether the
Monsanto load should be priced under a single contract versus the Company’s
suggestion of a multiple contract approach.
Additionally, and also in the nature of the regulatory treatment afforded
Monsanto, I will address the issue of ‘situs versus system’ treatment of the
Monsanto load which has been raised through the direct testimony of
PacifiCorp witness Mr. Taylor.
Q. ARE YOU SPONSORING ANY EXHIBITS IN CONNECTION WITH
YOUR TESTIMONY?
A. Yes. I am sponsoring Exhibit 212 through Exhibit 215.
Q. PLEASE PROVIDE A BRIEF EXPLANATION OF YOUR
CONCLUSIONS.
A. The Monsanto load has the capability of offering a variety of interruptible
services to PacifiCorp that are of significant value. The controversy in this
filing arises from two issues; how the contractual relationship is to be defined
Testimony of Richard Anderson, Docket No. PAC-E-01-16 4

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and the value of the contract itself. I posit that there is no fundamental reason
that the Monsanto/PacifiCorp contractual relationship cannot be defined by a
single contract. Despite the Company’s arguments referring to market
volatility and price risk they believe they will incur, the Monsanto load
provides substantial benefits to the PacifiCorp system, its customers, and the
state of Idaho and to the local southeast Idaho community. The economic risk
to Monsanto resulting from the proposed price increase and the terms and
conditions of the Company’s proposed contract places a large amount of
economic activity at risk. Additionally, the Company’s proposal to change
the status of the contract to a ‘situs’ standing is premature and is an attempt to
circumvent the discussion and analysis of the same issue in an
interstate/interjurisdictional setting.
III. PRICING VEHICLES:
MULTIPLE CONTRACTS VERSUS SINGLE INTEGRATED CONTRACT
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Q. WHAT VALUE DOES AN INTERRUPTIBLE CUSTOMER PROVIDE
PACIFICORP?
A. An interruptible customer can provide the Company with an array of cost
effective options to meet certain of the Company’s obligations. As an
example, the ability of an interruptible customer to curtail its load can help the
Company meet operating reserves or peak load requirements.
Q. DOES PACIFICORP HAVE AN INCREASING PROBLEM MEETING
Testimony of Richard Anderson, Docket No. PAC-E-01-16 5

PEAK LOAD OBLIGATIONS TODAY AS COMPARED TO 1995? 1
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A. It would appear so. Growth in the Utah urban areas has been substantial
during the last two decades. The Company’s recently filed updated RAMPP
plan in Utah acknowledges the need to meet increasing load growth. In
response, the Company has invested in new generation (or entered into a long-
term lease arrangement) at West Valley City, Utah and at its existing Gadsby
facility in Salt Lake City. Additionally, the Company has pledged to
aggressively expand its demand side management programs as an additional
tool to meet peak load needs.
Q. WHAT OPTIONS DOES THE COMPANY HAVE TO HELP MEET
ITS PEAK LOAD AND OPERATING RESERVE REQUIREMENTS
OTHER THAN INTERRUPTIBLE SERVICE?
A. Absent its investment in demand side management programs, the options that
are available are limited to two: 1) it can choose to purchase power on the
wholesale market or 2) it can build additional generation.
Q. WHAT ARE THE RISKS AND DISADVANTAGES OF RELYING ON
MARKET PURCHASES TO MEET THESE OBLIGATIONS?
A. The risk associated with reliance on the market is that of price volatility. The
substantial price movements the western wholesale market witnessed
beginning in May 2000 was evidence that the market does entail price risk.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 6

Q. WHAT ARE THE RISKS AND DISADVANTAGES OF RELYING ON
NEW GENERATION UNITS TO MEET PEAK LOAD AND
OPERATING RESERVE REQUIREMENTS?
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A. The primary risk and disadvantage lies in the capital outlay necessary to build
new generation units and the lead time to construct such units. The capital
outlay can be substantial and the construction of the unit is always subject to
delays in meeting its timing objectives.
Q. ARE THERE ADVANTAGES OF RELYING ON INTERRUPTIBLE
LOADS TO MEET THESE OBLIGATIONS OF THE COMPANY?
A. Yes. Utilizing interruptible load from its existing customer base provides the
advantages of no major capital outlay and is currently available. Thus, the
Company is able to call upon these existing services to meet today’s
obligations and do so without incurring substantial capital cost.
Q. HAS PACIFICORP REDUCED OR ELIMINATED INTERRUPTIBLE
OPTIONS FROM ITS CUSTOMER BASE?
A. Yes. Prior to the 1995 Contract with Monsanto, economic interruptions were
allowed as part of the contractual relationship between Monsanto and
PacifiCorp. At the Company’s request, language relating to economic
interruptions was removed from the current contract. Additionally, in the
recent deferred accounting case before this Commission (PAC-E-02-1), the
Company altered the historic treatment of irrigation customers as interruptible
customers and placed them under firm service.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 7

Q. DO YOU HAVE AN EXAMPLE OF THE CAPACITY COST
INCURRED BY THE COMPANY IN THE NEW GADSBY PEAKING
UNITS?
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A. According to the direct testimony of Company witness Dr. Rand Thurgood
(page 12, line 8) in the Utah Docket No. 01-035-37 (Response to Staff Data
Request No. 2), the installed capacity cost is approximately $608/kW.
Q. IN THE COMPANY’S PLANNING PROCESS (RAMPP), HOW DOES
THE COMPANY PROPOSE TO MEET ITS PEAK LOAD
OBLIGATIONS?
A. According to the updated RAMPP-6 Action Plan submitted to the Utah Public
Service Commission on June 14, 2002, the Company’s action plan selected
265 mWs of Simple Cycle CT in the years 2002 and 2003. The model also
selected 126 mWs of wind power in 2003. The selection of the Simple Cycle
CTs in 2002 and 2003 are virtually already completed by the Company’s
investment in the Gadsby Peakers and its long-term lease on the new West
Valley units. The model did not select any super peak purchases. I have
included as Exhibit 212 (RMA-1) the synopsis of the action plan as presented
by the Company to the Utah Commission.
Q. DOES THE PLAN INDICATE THAT INTERRUPTIBLE RESOURCES
WILL BE USED TO HELP MEET THE COMPANY’S FUTURE
NEEDS?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 8

A. No. Apparently the Company’s action plan centers on the acquisition of new
generation assets combined with the development of additional demand side
management programs.
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Q. WHAT ATTRIBUTES OR SERVICES DOES MONSANTO OFFER TO
PACIFICORP THAT PROVIDE VALUE IN HELPING MEET THE
COMPANY’S NEEDS?
A. Because of the operational characteristics of its plant, Monsanto is capable of
offering curtailment or interruptions in a variety of circumstances. Primarily,
Monsanto can offer flexibility, both economic and emergency interruptions,
ease of interruption, interruption implementation in a matter of minutes, and
the avoidance of a large capital outlay.
Monsanto can interrupt or take off line one to three furnaces. In so doing,
the actual interruption can range from 46 mWs to 166 mWs. PacifiCorp
acknowledges these attributes. Mr. Griswold’s Exhibit 7 is a set of draft
contracts for super-peak load curtailment and operating reserves. The
Company therefore recognizes that Monsanto can and is willing to offer
curtailment for the purposes of operating reserves and for helping the
Company meet is super-peak load requirement.
Finally, Monsanto offers the benefit of an 85% load factor that can prove
helpful in the ‘shoulder periods’ compared to an open market purchase for
interruption services. Most market purchases are in a 6X16 block hour
format, while the Company’s super peak problem is less in duration. The
market purchase tends to place the Company in a position of needing to resale
Testimony of Richard Anderson, Docket No. PAC-E-01-16 9

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some of those hours at a time during which the prevailing market price is low.
A contractual arrangement with Monsanto avoids this ‘shoulder period’
problem.
Q. HAS THE COMPANY PREVIOUSLY ARGUED THAT THE
MONSANTO LOAD PROVIDED A BROAD RANGE OF BENEFITS?
A. Yes, in fact the Company expressed support of the 1995 Contract with
Monsanto predicated on an argument that the Monsanto load provided a host
of benefits. In their “Technical Assessment Package for Power Supply
Agreement between Monsanto Company and PacifiCorp” dated November
1995, the Company “requests IPUC approval of the New Agreement by virtue
of the benefits it provides to other customers, the Soda Springs community,
the State of Idaho, the United States, Monsanto and PacifiCorp (see Exhibit
204).
Q. HAS THE COMPANY HISTORICALLY SERVED THE MONSANTO
LOAD UNDER A SPECIAL CONTRACT RELATIONSHIP?
A. Yes, there has existed a special contract for the Monsanto load for the last two
decades. Monsanto witness Mr. Smith discusses this historical relationship in
his testimony.
Q. IN THE COMPANY’S FILING, HAS IT SUGGESTED THAT THE
APPROACH TO PRICING THE MONSANTO LOAD BE ALTERED
FROM THE HISTORIC WAY IT HAS BEEN PRICED?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 10

A. Yes, the Company has advocated that the pricing of the Monsanto load be
constructed as a firm load which is different than the way it has been treated
in the past. Both Company witnesses Taylor and Griswold provide reasons
the Company has chosen to revamp their new pricing approach. Mr. Griswold
summarizes the reasons as being both commercial and regulatory.
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Q. WHY IS THE COMPANY PROPOSING THAT THE MONSANTO
CONTRACT NOW BE VIEWED AS A FIRM POWER SALE?
A. The Company was asked to explain why it now considers the Monsanto load
as firm (Data Request No. 35). The response was two fold: 1) that the current
supply contract did not allow for economic disruption, and 2) the Company’s
practice is to limit load curtailment due to system emergencies to two hours,
which is insufficient duration to be relied on for capacity.
In addition to the reasons stated in Data Response No. 35, both Mr. Taylor
and Mr. Griswold suggest that market conditions have been altered to the
extent that pricing a new contract cannot be undertaken in a manner similar to
the previous contract. Both witnesses stated that market risk is a primary
issue for the Company.
Q. DO YOU AGREE WITH THE COMPANY’S REASONS?
A. No I do not agree. The absence of economic interruptions in the 1995
Contract was at the request of the Company. It was not predicated on the fact
that Monsanto could not, nor would not be willing, to provide such
interruption services. The absence of language on economic interruptions was
Testimony of Richard Anderson, Docket No. PAC-E-01-16 11

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thus a contractual issue, not a technical issue. As indicated in Mr. Schettler’s
testimony, Monsanto is willing today to offer the Company curtailment
services for economic reasons.
Secondly, the fact that the Company chose to limit the curtailment in the
1995 Contract to system emergencies gives no indication Monsanto lacks the
capability to offer such curtailment for longer time durations. The time limit
indicated in Data Response No. 35 is artificial. In fact, Monsanto has offered
longer durations under its recent and current operating reserve agreements.
Q. IT WOULD APPEAR THAT THE SERVICES REFERENCED IN
DATA RESPONSE NO. 35 ARE IN FACT AVAILABE FROM THE
MONSANTO LOAD. IS THAT CORRECT?
A. Yes, both curtailment to meet load requirements and operating reserve
services are available from Monsanto, and are included in Monsanto’s
proposed agreement
It would also appear that the Company does not believe that the need for
interruption services, be it for peak load curtailment or operating reserves, is a
short run phenomenon. As indicated in their updated RAMPP-6 Plan and
their recent investments in the Gadsby and West Valley units, the Company
views the need for operating reserves and load curtailment services as a long-
term issue.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 12

Q. PLEASE PROVIDE A SUMMARY OF HOW THE PRICING OF THE
MONSANTO LOAD WOULD CHANGE UNDER THE COMPANY’S
PROPOSAL.
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A. The pricing change is multi-faceted but shifts the Monsanto load to a ‘firm’
price while providing short-term supplemental contracts to price other
attributes such as peak load curtailment and operating reserves. Additionally,
the economic value assigned to the emergency curtailment contained in the
1995 Contract has been eliminated. The Company’s proposal alters the
traditional way in which special contract customers have been priced under
the “contribution to fixed cost standard.” The new pricing scheme the
Company seeks would abandon this historic approach of a single price/single
contract and, instead, use a multiple contracts approach where Monsanto’s
attributes such as curtailment or operating reserves would be priced separately
and would constitute a ‘purchase power’ contract or a contract to purchase
operating reserves. The length of the contracts (for firm power and for
interruptible services) would differ, thus creating a disconnect in the price
certainty Monsanto would experience in their overall electric cost. This
approach introduces a significant amount of uncertainty and potential rate
instability into Monsanto’s operations.
Q. IS THE USE OF A MULTIPLE CONTRACT STRUCTURE
NECESSARY TO PRICE INTERRUPTIBLE SERVICES OFFERED
BY MONSANTO?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 13

A. No. The same net value can be obtained through the single contract structure
which has been employed for years. Mr. Griswold, under cross examination
in the recent Utah docket involving a special contract for Magcorp and one in
which the Company had attempted to use the multiple contract approach,
admitted that a single contract structure would suffice (Exhibit 213 (RMA-2)).
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Q. IN YOUR OPINION, HAS THE COMPANY MADE AN
AFFIRMATIVE CASE FOR ALTERING THE STRUCTURE OF THE
MONSANTO CONTRACT TO A MULTIPLE CONTRACT
APPROACH?
A. No. The reasons put forth by the Company do not provide a compelling
reason why the structure of the contract should change. Surely the reasons
delineated in Data Response No. 35 are insufficient to force a change in the
contract structure.
With regard to the market concerns expressed in Mr. Griswold’s and Mr.
Taylor’s direct testimony, I believe they also cannot justify a structural change
in the way the contract is designed. I will speak more on the economic
arguments later in this testimony.
IV. SITUS VERSUS SYSTEM RESOURCE 18
TREATMENT OF THE MONSANTO CONTRACT 19
Testimony of Richard Anderson, Docket No. PAC-E-01-16 14

Q. DOES THE COMPANY’S PROPOSED APPROACH ALSO ALTER
THE TRADITIONAL MANNER OF ALLOCATION OF THE COST
AND BENEFITS FROM THE MONSANTO CONTRACT?
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A. Yes. The proposed approach also encompasses a change in how the allocation
of costs and benefits derived from the Monsanto load are to be allocated. The
historic approach of treating the Monsanto load as a ‘system resource’ is
abandoned in favor of a ‘situs’ treatment. In other words, in previous
Monsanto’s contracts both the costs and benefits associated with the contract
were spread across all jurisdictions within the PacifiCorp system. The
approach now advocated by the Company alters the current system and
assigns the revenues and costs to the Idaho jurisdiction only.
Q. WHY DOES MR. TAYLOR BELIEVE THE SITUS APPROACH TO
PRICING THE MONSANTO LOAD IS NECESSARY?
A. Mr. Taylor states that pricing based on the traditional approach is no longer
applicable due to conflicts on special contract treatment between the
PacifiCorp state jurisdictions. The Company offered as evidence of this
conflict Data Response No. 39 (a), testimony submitted in Oregon and Utah
by members of the respective Commission’s staff.
Q. DO THESE TESTIMONIES SUPPORT MR. TAYLOR’S POSITION
THAT THE TREATMENT OF SPECIAL CONTRACTS IS A MAJOR
CONCERN?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 15

A. No. The testimonies do discuss the issue of the allocation of special contracts.
However, the issue arose in an Oregon docket in which there was a stipulation
ultimately agreed to by all parties, including the Company. The issue was not
therefore litigated before the Commission itself. With regard to the Utah staff
position, the Utah Commission recently supported a special contract between
the Company and Magcorp in which the Commission chose not to address the
issue on a permanent basis but instead references the Multi-State Process as
the more appropriate forum through which the allocation issue should be
resolved (see Exhibit 208). Consequently, the testimonies cited by the
Company do not appear to be conclusive that the situs approach to treating
special contracts has now been adopted as policy in the other states.
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Q. WHAT SPECIFICALLY IS OF CONCERN TO THE COMPANY
REGARDING THE ALLOCATION OF SPECIAL CONTRACTS?
A. The Company, in response to Data Request No. 27, stated, “PacifiCorp’s
proposed treatment is meant to eliminate the risk the Company faces that
states may not accept system revenue credit treatment for special contract
customers outside their own state, thus resulting in shareholder subsidization
of special contracts.”
Q. AT THE TIME OF THE 1988 UTAH POWER/PACIFIC POWER
MERGER AND THE 1999 SCOTTISHPOWER MERGER, DID THE
COMPANY INDICATE IT WOULD ACCEPT RESPONSIBILITY FOR
ALLOCATION RISKS?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 16

A. Yes. PacifiCorp clearly was aware that cost allocation problems between the
jurisdictions existed at the time of both the 1988 and 1999 mergers. The
Company agreed that its shareholders would assume all risks that could result
from less than full system recovery if allocation methods between the states
differed. These commitments are summarized and discussed in “Discussion
Document” presented by PacifiCorp Regulation Manager Gordon McDonald
dated May 13, 2002, and presented at the May 29-30 Multi-State Process
meeting in Case No. PAC-E-02-3, a copy of which is attached as Exhibit 214
(RMA-3).
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Q. IS THIS TREATMENT OF SPECIAL CONTRACTS AN ISSUE
UNDER INVESTIGATION BY THE COMPANY AND THE VARIOUS
STATE COMMISSIONS?
A. Yes, this is one of the issues now under investigation by all the parties
involved in the Multi-State Process. In fact, as part of that process, a special
contracts task force has been formed to analyze the different approaches that
may be employed in the treatment of special contracts within the PacifiCorp
system. To that end, every party in this case, including the Idaho Commission
staff, is an active participant in the task force work.
Q. DOES THIS INVESTIGATION INCLUDE AN INQUIRY INTO THE
ISSUE OF SYSTEM VERSUS SITUS TREATMENT OF SPECIAL
CONTRACTS?
A. Yes it does.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 17

Q. HAS THE COMPANY PROVIDED AN ANALYSIS OF WHAT COSTS
WOULD BE INCURRED IN THE IDAHO JUSIDICTION IF THE
MONSANTO CONTRACT IS TREATED AS A SITUS ALLOCATION?
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A. Yes. Mr. Taylor has provided analysis reflecting the cost allocation to the
Idaho jurisdiction if the Monsanto contract is treated as a situs resource.
Monsanto witness Ms. Iverson, who is providing testimony on the cost of
service study, addresses Mr. Taylor’s analysis.
Q. HAS THE COMPANY PROVIDED ANY ANALYSIS OF HOW THE
SITUS TREATMENT MAY AFFECT OTHER PACIFICORP
RATEPAYERS IN IDAHO?
A. No. The Company’s presumption is that the situs allocation of cost will be
borne entirely by Monsanto. Under such a pricing scheme the rate increase to
the Soda Springs plant would roughly be in the 70 percent range. The
Company provided no analyses of other scenarios whereby the situs allocation
of the cost would be spread among Monsanto and other Idaho ratepayers as
well. Thus, it remains uncertain how other ratepayers could be affected by the
ultimate pricing of the Monsanto load, except in the case where Monsanto
absorbs the entire situs allocation of costs.
Q. IS IT YOUR OPINION THAT TREATMENT OF SPECIAL
CONTRACTS BY OTHER JURISDICTIONS IS A REASON THAT
PRICING OF THE MONSANTO LOAD SHOULD BE ALTERED
FROM PAST PRACTICES?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 18

A. The question of treatment of special contracts by the various Commissions to
whom PacifiCorp is regulated is a critical issue under investigation in the
MSP process. Representation in that process consists of each of the
Commissions plus other interested parties. To that end, the question of special
contract treatment will be resolved by all parties of interest. The MSP process
thus is serving as the forum through which this issue will be decided. There
may emerge through the MSP process a new interjurisdictional allocation of
special contract costs and benefits. On the other hand, the MSP process could
result in no change at all. Until such time, there is no strong reason as to why
the treatment of such contracts should change. It is speculation at this period
in time. Besides, such treatment is not relevant to the Monsanto load. They
provide benefits to PacifiCorp regardless of how they are treated.
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Testimony of Richard Anderson, Docket No. PAC-E-01-16 19

V. POTENTIAL CHANGE IN RESERVE 1
REQUIREMENTS OF WESTERN UTILITIES 2
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Q. DO YOU AGREE THAT POTENTIAL CHANGE IN THE WECC
RESERVE REQUIREMENTS SERVES AS A REASON TO PRICE
THE MONSANTO LOAD DIFFERENTLY THAN IT HAS BEEN
PRICED IN THE PAST?
A. No, I disagree. The extent that the WECC may change the way reserves are
measured, and by doing so, change the level of reserves required of western
utilities is still uncertain. To employ the language of traditional ratemaking,
the discussion around how and if the reserve requirements should change is
not a ‘known and measurable’ future event and thus should not at this time
play a role in the setting of price on the Monsanto load.
VI. WESTERN POWER MARKET VOLATILITY AND PRICE RISK 13
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Q. MR. GRISWOLD SUGGESTS THAT BECAUSE OF HIGH MARKET
PRICES, THE COMPANY ABSORBED SUBSTANTIAL ECONOMIC
LOSS IN THE SUMMER OF 2001 SERVICING THE MONSANTO
LOAD. DO YOU AGREE WITH HIS ARGUMENT?
A. No, I disagree. The Monsanto load has been served by the Company for well
over fifty years. As noted in the 1995 Technical Assessment Package, no
incremental generation resource was built or purchased to simply serve the
Monsanto load. The presence of the Monsanto load on the PacifiCorp system
is surely not a new event. Mr. Griswold suggests that the Company
Testimony of Richard Anderson, Docket No. PAC-E-01-16 20

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specifically had to purchase power at prices in excess of $150/mWh to serve
Monsanto (Griswold Direct Testimony, at page 3, lines 2-4). To that extent it
made purchases of higher cost than its own generation cost. How Mr.
Griswold was able to color code electrons and link the purchase of wholesale
power directly to the Monsanto load is unclear. What is clear is that the
Company has made wholesale purchases recently to meet its peak load
requirements. To that extent, prices of some purchases likely exceeded the
price paid by all its customers (both tariff and special contract customers).
Inadequate generation capacity to meet peak load is not a problem that can be
traced to the presence of the Monsanto load and the economic cost of meeting
that peak load is not attributable to the existence of the current Monsanto
contract.
Q. MR. TAYLOR HAS STATED THAT MARKET PRICES AND THE
COMPANY’S AVOIDED COST NOW MAKE THE CONTRIBUTION
TO FIXED COST STANDARD MUCH HARDER TO MEET. DO YOU
AGREE?
A. Mr. Taylor is correct only if one assumes the narrowest definition of how the
Monsanto load is served. The concept of a ‘contribution to fixed cost
standard’ assumes that the variable cost the special contract customer will pay
is less than the tariff rate reflecting an embedded average cost. Mr. Taylor has
used as a proxy for the variable cost the western wholesale market price.
Instead, variable cost should reflect the variable cost incurred in their system.
Again, Mr. Taylor seems to implicitly argue that the Monsanto load is served
Testimony of Richard Anderson, Docket No. PAC-E-01-16 21

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in its entirety out of market purchases. Mr. Taylor’s position is that the
variable cost (as defined by market prices) now exceeds the embedded cost of
the Company. Under this rather restrictive scenario, the special contract
customer is economically better off being priced under a tariff rate.
To suggest that the Monsanto load is served from wholesale purchases is also
at odds with the long-held position of Company officials that you cannot
“color code” electrons. In fact, PacifiCorp is a system and Monsanto is served
from system resources identically to other PacifiCorp customers.
Q. DOES PRICE VOLATILITY IN THE WESTERN MARKET CREATE
EXCESSIVE PRICE RISK FOR THE COMPANY IN RELATION TO
THE VALUE OF INTERRUPTIBILITY?
A. This would hold true only if the Company were forced to continually pay a
value for interruptible provisions that was in excess of the value they would
pay to acquire such services in the market. In other words, there is a single
scenario where the Company would incur price risk on the value of
interruptible service – that being the case where the market value of the
service is constantly below the contract price for similar service. It is
interesting to note that the Company witnesses express fear that the wholesale
market price will be (or has been) just the opposite, too high. Under this
scenario, the price risk associated with a fixed value for interruptible service
would be zero. Setting a fixed value for interruptible provisions during the
term of a contract does not imply that the Company has now taken on a
substantial amount of price risk. It is interesting to note, that the proposed
Testimony of Richard Anderson, Docket No. PAC-E-01-16 22

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contract structure as advocated by the Company now would shift price risk to
Monsanto.
Q. IS IT NOT TRUE, HOWEVER, THAT WITH ECONOMIC GROWTH
IN THE WESTERN REGION, ELECTRIC MARKET PRICES WILL
TEND TO RISE OVER TIME?
A. This would be the outcome if the supply of power remained constant over the
same time period or if curtailment options were systematically eliminated.
The price will reflect both the demand and supply of power. One significant
outcome of the high western market prices during 2000 and 2001 was an
aggressive generation expansion plan in the western states. Exhibit 215
(RMA-4) delineates the current “planned” and “under construction”
generation units in the WECC. To the extent that the increase in western
market prices was attributable to a capacity shortage, the new construction
should resolve much of this problem. Additionally, if prices remain high one
would expect that demand responses on behalf of consumers would lessen the
upward pressure on prices. Again, the critical point is that one cannot state
that prices will be either increased or decreased on a continual basis. Prices
tend to move in both directions.
Q. DOES MR. GRISWOLD’S SUGGESTED PRICING APPROACH
REDUCE THE UNCERTAINTY SURROUNDING THE VALUE OF
THE INTERRUPTIBLE RESOURCE?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 23

A. No. Using the short-term market as a barometer of the value of the
interruptible resource will add greater uncertainty instead of lessening
uncertainty. Equating Monsanto’s contribution to meeting peak resources or
to contributing to operating reserve requirements under Mr. Griswold’s
suggested pricing scheme will result in the value of that contribution
continually being uncertain.
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The short-term nature of the Company’s current proposal for procurement
of curtailment creates substantial price uncertainty and risk to Monsanto. It
effectively places Monsanto in the electricity business via the assignment of
power price risk to the Soda Springs facility. Unlike the Company, Monsanto
is not situated to effectively hedge this risk.
Q. MR. GRISWOLD SUGGESTS THAT THE COMPANY’S PREFERRED
APPROACH TO PRICING THE CONTRACT IS TO SET AN OPTION
VALUE FOR THE RIGHT TO INTERRUPT WITH MARKET BASED
VALUE FOR THE ACTUAL HOURS INTERRUPTED. HOW DOES
THIS PRICING APPROACH MIRROR THE SHORT TERM
MARKET?
A. It is unclear exactly how the proposed pricing approach would mirror the short
term market on an ongoing basis. Mr. Griswold’s Exhibit 7 accompanying his
direct testimony highlights the fact that the Monsanto interruptions for the
purposes of load curtailment would be priced under a scheme whereby there is
a monthly call option ($/kw-month) and a ‘strike’ payment ($/kWh) on the
call. Both the option value and the strike price remain constant for the term of
Testimony of Richard Anderson, Docket No. PAC-E-01-16 24

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the contract. Thus, when the Company suggests that the value of the
interruptible service Monsanto can provide should equate to the short-term
market, it is not necessarily the case that the Company is insisting on a
moving value for such services. The combination of an option value and
strike price does set a predetermined value for the interruptible service that
does not move or change with variations in the short-term market.
Q. HOW SHOULD THE INTERRUPTIBLE SERVICE THAT
MONSANTO CAN OFFER BE PRICED?
A. It should be priced as part of an integrated, single contract structure. Mr.
Griswold’s testimony suggests that by pricing interruptible provisions
separately there will be a better match of value to price. Of critical concern to
the Company is flexibility in the contract price. Mr. Griswold’s example
noted above pertaining to the $150 market price suggests that the single
contract has exposed the Company to considerable market risk. Yet the
Company has already offered a set price for interruptions to meet super-peak
requirements through the use of a strike price concept. The strike price, which
would be paid to Monsanto along with a kw-based monthly option value, is
set to a predetermined value of $/mWh. It would appear therefore that the
Company is not opposed to the use of a set price for interruptions aimed at
alleviating its super-peak problem.
Secondly, the integrated contract provides the necessary match between
valuing the interruptible service and the provision of power to the Soda
Springs facility. If these time frames are different, there exist price risk and
Testimony of Richard Anderson, Docket No. PAC-E-01-16 25

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uncertainty for Monsanto in a market in which they do not have access to
hedge.
It has been documented that the Monsanto load provides benefits to the
PacifiCorp system. Yet, implicit in the Company’s position seems to be an
argument that there exist markets to which Monsanto can sell these services
should the Company decline to purchase. In fact, the world in which
Monsanto finds itself is one characterized by monopsony, a situation in which
there exists a single buyer of a service or good. Economic theory would
demonstrate that the monopsony situation is just as harmful as that of the
more well-known market problem of monopoly. Each one results in a
distorted market price and harmful economic behavior resulting from the
abuse of market power. It is an interesting twist of facts that the Company
insists that the price of the Monsanto interruptible services be priced at market
yet there exist only a market characterized by a single buyer who, by
definition, has substantial market power.
Monsanto witnesses Mr. Rosenberg addresses the specifics of pricing the
special contract.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 26

VII. OTHER CONSIDERATIONS IN
THE PRICING OF THE MONSANTO CONTRACT
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Q. ARE THERE OTHER HARMFUL ECONOMIC EFFECTS LIKELY
TO RESULT FROM THE PROPOSED PRICING SCHEME OFFERED
BY THE COMPANY?
A. The proposed contract for firm power the Company has offered is roughly a
70 percent increase in the current Monsanto contract. The notion or concept
of gradualism seems to have been abandoned by the Company in proposing
this large an increase. For any entity whose power cost represents a
significant input cost into their productive process, such an increase as
proposed by PacifiCorp is certain to result in substantial economic disruption.
When asked in a data request (Data Request No. 117) why the Company did
not employ some threshold limit when developing its proposed Monsanto rate,
the Company simply replied because the proposed rate is not being offered as
part of a general rate case. We are left to ponder why this is to be a
compelling argument. We are also left with the notion on behalf of the
Company that a 70 percent rate increase is acceptable and that any form of
gradualism is not to be employed in this filing.
Q. HAS THE COMPANY TAKEN PRIOR POSITIONS ON
GRADUALISM OR AVOIDANCE OF RATE SHOCK WHEN
ADVOCATING A MAJOR RATE INCREASE?
Testimony of Richard Anderson, Docket No. PAC-E-01-16 27

A. Yes. In response to Data Request No. 22, the Company provided previous
testimony of Mr. Taylor where he advocates ‘phased in’ changes in rates to
avoid substantial rate impacts. This does not appear to be the case in this
filing, however.
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Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes it does.
Testimony of Richard Anderson, Docket No. PAC-E-01-16 28

APPENDIX A

Resume

Richard M. Anderson
Principal
Energy Strategies, LLC
39 West Market Street, Suite 200
Salt Lake City, Utah 84101

Education:

University of Utah, Ph.D., Economics, 1985

North Texas University, M.S., Economics, 1975

University of Texas, Austin, B.A., Business Administration, 1971

Professional Positions:

1999 – Present Principal, Energy Strategies, LLC

1994 – 1999 Senior Consultant, Energy Strategies, Inc.

1985 – 1994 Director, State of Utah, Division of Energy

1983 – 1985 Assistant Director, State of Utah, Utah Energy Office

1981 – 1983 Economist, State of Utah, Utah Energy Office

1976 – 1981 Teaching Fellow, University of Utah, Department of Economics

Professional Experience:

Utah Public Service Commission, Docket No. 01-035-23, In the Matter of the
Application of Pacificorp for Approval of Its Proposed Electric Rate Service Schedules &
Electric Service Regulations – Hunter Plant; Docket No. 01-035-29, In the Matter of the
Application of Pacificorp dba Utah Power & Light Company for a Deferred Accounting
Order; Docket No. 01-035-36, In the Matter of the Application of Pacificorp dba Utah
Power & Light Company for Recovery of Excess Wholesale Power Costs, Stipulation –
April 3, 2002

Nevada Public Utility Commission, Docket No. 01-11029, In re Application of Nevada
Power Company for authority to increase its annual revenue requirement for general rates
charged to all classes of electric customers and for relief properly related thereto, Direct
Testimony on Behalf of Nevada Coalition of Commercial Energy Consumers – February
20, 2002

Oregon Public Utility Commission, Case No. UM 995/UE 121/UC 578, In the Matter of
the Application of PacifiCorp for an Accounting Order Regarding Excess Net Power
Costs (UM 995); In the Matter of PacifiCorp’s Application for Partial Amortization of Its
Request to Defer Excess Net Power Costs and Approval of Its Request to Implement an
Amortization in Rates of Deferred Excess Net Power Costs (UE 121); The Industrial
Customers of Northwest Utilities and The Citizens’ Utility Board, Complainants, v.
PacifiCorp dba Pacific Power and Light Company, (UC 578), Defendant; Confidential
Direct Testimony of Richard M. Anderson on Behalf of Industrial Customers of
Northwest Utilities – January 11, 2002

Utah Public Service Commission, Docket No. 01-035-01, In the Matter of the
Application of PacifiCorp for an Increase in its Rates and Charges, Prefiled Direct
Testimony of Dr. Richard Anderson on Behalf of The UAE Intervention Group and
Nucor Corporation – June 4, 2001

Oregon Public Utility Commission, Case No. UE 111, In the Matter of the Revised Tariff
Schedules Applicable to Electric Service Filed by PacifiCorp, Surrebuttal Testimony on
Behalf of Industrial Customers of Northwest Utilities - August 23, 2000 (Case Settled)

Utah Public Service Commission, Docket No. 99-035-10, In the Matter of the
Application of PacifiCorp for Approval of Its Proposed Electric Rate Schedules and
Electric Service Regulations, Prefiled Rebuttal on Behalf of the Large Customer Group -
March 15, 2000

Utah Public Service Commission, Docket No. 99-035-10, In the Matter of the
Application of PacifiCorp for Approval of Its Proposed Electric Rate Schedules and
Electric Service Regulations, Prefiled Direct Testimony on Behalf of the Large Customer
Group - February 4, 2000

Wyoming Public Service Commission, Docket No. 20000-EA-99-146, In the Matter of
the Application for Approval of Sale of Centralia, Direct Testimony on Behalf of
Wyoming Industrial Energy Consumers - December 22, 1999

Wyoming Public Service Commission, Docket No. 20000-ER-99-145, In the Matter of
the Application of PacifiCorp for Approval of Revised Tariff Schedules, Direct
Testimony on Behalf of Wyoming Industrial Energy Consumers - December 20, 1999

Idaho Public Utilities Commission, Docket No. PAC-E-99-1, In the Matter of the Joint
Application and Petition of PacifiCorp and Scottish Power, (plc) for a Declaratory Order
or Order Approving Proposed Transaction and an Order Approving the Issuance of
PacifiCorp Common Stock, Direct Testimony on Behalf of Solutia, Inc. - May 17, 1999

Wyoming Public Service Commission, Docket No. 2000-EA-98-141, In the Matter of the
Application and Petition of PacifiCorp and Scottish Power (plc) for Authority to
Reorganize PacifiCorp as a Wholly Owned Subsidiary of Scottish Power (plc), Direct
Testimony on Behalf of Wyoming Industrial Energy Consumers - May 25, 1999

Utah Public Service Commission, Docket No. 98-2035-04, In the Matter of the
Application of PacifiCorp and Scottish Power (plc) for an Order Approving the Issuance
of PacifiCorp Common Stock, Direct Testimony on Behalf of Large Customer Group -
June 18, 1999

Idaho Public Utilities Commission, Docket No. IPC-E-97-12, In the Matter of the
Application of Idaho Power Company for Authority to Increase Its Rates and Charges to
Recover Demand Side Management/Conservation Expenditures, Direct Testimony on
Behalf of Micron Technology, Inc. - May 11, 1998

Utah Public Service Commission, Docket No. 97-035-04, In the Matter of a Proceeding
to Establish Allocation Methodology to Separate PacifiCorp’s Assets, Expenses and
Revenues Between Various States, Prefiled Direct Testimony on Behalf of Utah Electric
Deregulation Group – October 24, 1997

Wyoming Public Service Commission, Docket No. 200000-ER-95-99, In the Matter of
the Application of PacifiCorp, dba Pacific Power & Light Company, for Approval of
Revised Tariff Schedules and an Alternative Form of Regulation Plan, Witness on Behalf
of Wyoming Industrial Energy Consumers – April 8, 1996