Rebuttal 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 )

Rebuttal Testimony of

Richard M. Anderson

On Behalf of

Monsanto Company

August 30, 2002

energy strategies

Salt Lake City/Phoenix/Austin

I. INTRODUCTION 1
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Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. Richard M. Anderson, 39 West Market Street, Suite 200, Salt Lake City, Utah
84101.
Q. ARE YOU THE SAME RICHARD ANDERSON THAT PREVIOUSLY
FILED DIRECT TESTIMONY IN THIS PROCEEDING?
A. Yes.
Q. WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY?
A. I will address the following issues; (1) the proposal of the Company contained
in their rebuttal testimony that the contracts for firm service and interruptiblity
be coterminous in their duration, (2) the issue of whether the treatment of the
Monsanto load should be situs or system based, and (3) the proper cost of
replacement power should Monsanto exercise its buy-through option when
interrupted for economic curtailment.
II. DURATION OF SEPARATE CONTRACTS 15
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Q. MR. GRISWOLD SUGGESTED IN HIS REBUTTAL TESTIMONY
THAT THE TERMS OF THE PROPOSED SEPARATE CONTRACTS
BE ALIGNED. DO YOU AGREE?
Rebuttal Testimony, Richard Anderson, Docket PAC-E-01-16 1
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A. Yes, I do agree. The separation of the terms of the proposed agreements
would place substantial economic exposure on Monsanto. I presented this
argument in my previously filed direct testimony. If the contracts have
different duration terms, the years in which the contracts are no longer tandem
would result in Monsanto incurring price uncertainty and risk.
Q. HAS THE COMPANY PROVIDED ASSURANCES THAT THE
DURATION OF THE PROPOSED CONTRACTS WILL BE
ALIGNED?
A. Mr. Griswold commits in his rebuttal testimony that both proposed contracts
will have the same duration.
Q. DOES THIS ASSURANCE PROVIDE MONSANTO WITH THE
PRICE CERTAINTY AND STABILITY THEY SEEK IN THEIR
ELECTRIC COSTS?
A. No, the proposal made by Mr. Griswold provides no such assurances. While
the Company will agree to link the duration of the proposed contracts (which
is a necessary step in creating price certainty and stability) the proposed terms
that govern the value of the contracts remain subject to adjustments. Mr.
Griswold notes that the interruptible agreement would be subject to reopeners
(Griswold Rebuttal, p. 9, line 8). In fact, the impetus to change the value of
the interruptible contract may come from proceedings or task force
investigations in jurisdictions other than Idaho. This places Monsanto in a
most peculiar position whereby their contract value can be altered in forums
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or proceedings in which they do not and cannot participate. Clearly such a
proposal is unacceptable and would be unacceptable to any entity placed in a
similar situation. It also undermines any attempt to provide price certainty
and stability.
Q. HOW DO YOU PROPOSE THAT THE PRICE CERTAINTY BE
OBTAINED?
A. In my direct testimony I argued that price certainty is obtainable through the
more traditional pricing vehicle of a single contract. That position remains
true. However, if the Company proposes to use separate contracts for firm
service and interruptible options, price certainty and price stability will only
be achieved if both contracts have the same duration and are not subject to
reopening clauses. Monsanto will support the two contract approach but only
under the conditions just stated.
Q. ARE THERE ANY OTHER CONDITIONS RELATINGTO THE
CONTRACTS THAT YOU BELIEVE ARE CRITICAL?
A. I would also suggest that each of the separate contracts, should the
Commission approve a multi-contract structure, be subject to Commission
review and approval. This condition would assure both parties of an impartial
forum through which their concerns could be made.
Rebuttal Testimony, Richard Anderson, Docket PAC-E-01-16 3
III. SITUS VERSUS SYSTEM TREATMENT OF THE MONSANTO LOAD 1
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Q. IN MR. TAYLOR’S REBUTTAL TESTIMONY, HE ARGUES THAT A
HYBRID APPROACH SHOULD BE ADOPTED REGARDING THE
ALLOCATION OF COST AND REVENUES ASSOCIATED WITH
THE MONSANTO CONTRACT. DO YOU AGREE WITH HIS
CONCLUSION?
A. No, I do not agree. The suggestion of Mr. Taylor is that the firm service
contract be treated in a situs manner while the interruptible contracts are
treated as a system power purchase. As I indicated in my direct testimony, the
issue of allocation, and particularly the issue of allocation of cost and
revenues from special contracts, is currently under investigation in a multi-
state process. That is the proper forum for determination of how special
contracts should be handled since the issue is not isolated to this docket but is
a universal issue within the PacifiCorp system. I find it interesting that Mr.
Griswold would suggest that forums other than this docket can be relied upon
to set the value of interruptiblity for Monsanto yet, when it comes to the
question of proper allocation of the Monsanto contracts, the Company seems
unwilling to defer the resolution of that issue to a separate forum (MSP
process).
Rebuttal Testimony, Richard Anderson, Docket PAC-E-01-16 4
IV. ECONOMIC COST OF BUY-THROUGH OPTION 1
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Q. HAS THE COMPANY PRESENTED A CONTRACT STRUCTURE
THAT WOULD ALLOW MONSANTO THE OPTION OF A ‘BUY-
THROUGH’ WHEN ECONOMIC INTERRUPTIONS ARE TAKEN?
A. Yes, Mr. Griswold presents such an option in his discussion of the general
commercial structure of the Company’s proposed contracts (Griswold
Rebuttal, p. 8, lines 20-22). The buy-through option is proposed as part of the
economic curtailment agreement.
Q. HOW DOES THE COMPANY PROPOSE PRICING POWER
OBTAINED FOR MONSANTO AS A RESULT OF ENACTING THE
BUY-THROUGH OPTION?
A. The proposal is to price the buy-through provision at the Palo Verde market
hub. The replacement power price will be set by the Palo Verde Firm On-
Peak Price multiplied by a monthly factor (percentages ranging from 110% to
130%) representing the monthly hourly shaping (Griswold Rebuttal, Exhibit
No. 10 (BWG-R2), p.4).
Q. DO YOU AGREE WITH THIS PRICING PROPOSAL?
A. No, I do not agree. The Palo Verde Index is traditionally the more expensive
index in the western grid. The Company has not offered pricing from the
Mid-C or the COB index which, under most circumstances will be priced
lower than Palo Verde. The fact that the Monsanto load resides on the eastern
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side of the PacifiCorp system does not imply that under all hours and all
circumstances power obtained on behalf of Monsanto will be done so through
a purchase at the Palo Verde hub. By setting the price at the Palo Verde
market hub, the Company has created a potential arbitrage condition whereby
they are able to obtain power within the western system at a price that is less
than that prevailing at the Palo Verde hub, yet resell the power to Monsanto at
a higher price. Additionally, the utilizing of any single index may not be
reliable due to a lack of liquidity prevailing at the market hub.
Q. IS THERE A DIFFERENT APPROACH YOU WOULD SUGGEST
FOR PRICING THE REPLACEMENT POWER?
A. Yes. The 1992 Contract between PacifiCorp and Monsanto also contained a
provision for buy-through and a standard for pricing the replacement power if
the buy-through option was enacted. Pricing for replacement power was
defined in Section 3.7 of the 1992 Contract as follows;
(i) When the Power Company has a market for
surplus sales, Monsanto shall have the option to
purchase power and energy at the surplus sales
price, or
(ii) if sufficient power and energy is available to
meet both Monsanto’s requirements and the surplus
sales market requirement, Monsanto shall have the
option to purchase the lowest cost energy available
to the Power Company to supply both markets. In
this event, cost of energy to Monsanto shall equal
the cost of energy to Power Company, plus
transmission losses if purchases from sources other
than Power Company are utilized to supply
Monsanto.
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Rebuttal Testimony, Richard Anderson, Docket PAC-E-01-16 7
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Q. ARE THESE CONDITIONS CONTAINED IN THE 1992 CONTRACT
SUPPORTED BY MONSANTO IN THIS PROCEEDING?
A. Yes, Monsanto would support the valuing of replacement power under a buy-
through provision as indicated in the above statement. These conditions
mirror the buy-through provisions of the PacifiCorp/Monsanto contracts that
existed up to the 1995 Contract. This would provide Monsanto with the
lowest cost replacement power at the time of curtailment.
Q. ARE THE 1992 TERMS FOR PRICING OF REPLACEMENT POWER
USEFUL IN THIS PROCEEDING?
A. Yes since they provide the lowest cost power to Monsanto and do not create
economic harm to the Company. It is surprising the Company would not
simply adopt these terms in their draft proposal instead of insisting on the use
of the Palo Verde hub market prices. In fact, Mr. Taylor advocates the 1992
contract as a comparable document to the Company’s proposed draft contracts
in this proceeding, citing specifically the terms of interruptiblity (Taylor
Rebuttal, p. 19, lines 16-20). If the 1992 contract contains terms of
interruptiblity comparable to what the Company is now offering as stated by
Mr. Taylor, the two conditions stated above as to pricing replacement power
should be utilized in the new contract.
Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY?
A. Yes.