Yankel Testimony.pdf

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Q. PLEASE STATE YOUR NAME, ADDRESS, AND EMPLOYMENT.

A. I am Anthony J. Yankel. I am President of Yankel and Associates, Inc.
My address is 29814 Lake Road, Bay Village, Ohio, 44140.

Q. WOULD YOU BRIEFLY DESCRIBE YOUR EDUCATIONAL
BACKGROUND AND PROFESSIONAL EXPERIENCE?

A. I received a Bachelor of Science Degree in Electrical Engineering from
Carnegie Institute of Technology in 1969 and a Master of Science Degree in Chemical
Engineering from the University of Idaho in 1972. From 1969 through 1972, I was
employed by the Air Correction Division of Universal Oil Products as a product design
engineer. My chief responsibilities were in the areas of design, start-up, and repair of
new and existing product lines for coal-fired power plants. From 1973 through 1977, I
was employed by the Bureau of Air Quality for the Idaho Department of Health &
Welfare, Division of Environment. As Chief Engineer of the Bureau, my responsibilities
covered a wide range of investigative functions. From 1978 through June 1979, I was
employed as the Director of the Idaho Electrical Consumers Office. In that capacity, I
was responsible for all organizational and technical aspects of advocating a variety of
positions before various governmental bodies that represented the interests of the
consumers in the State of Idaho. From July 1979 through October 1980, I was a partner
in the firm of Yankel, Eddy, and Associates. Since that time, I have been in business for
myself. I am a registered Professional Engineer in the states of Ohio and Idaho. I have
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presented testimony before the Federal Energy Regulatory Commission (FERC), as well
as the State Public Utility Commissions of Idaho, Montana, Ohio, Pennsylvania, Utah,
and West Virginia.

Q. ON WHOSE BEHALF ARE YOU TESTIFYING?

A. I am testifying on behalf of the Idaho Irrigation Pumpers Association
(Irrigators).

Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS
PROCEEDING?

A. I will address the appropriateness of maintaining interruptible options on
the PacifiCorp System, the need to continue the treatment of interruptible customers as
System customers, and an appropriate price discount for interruptions.

Q. WHAT ARE YOUR RECOMMENDATIONS?

A. I make three recommendations:
1. Interruptible options should continue on the PacifiCorp System;
2. Interruptible customers generally provide System wide benefits; and
therefore, should be treated as System customers, as opposed to getting
Sitas treatment.
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3. The rate given to interruptible customers should be based upon the
benefit that the interruptions provide to the System. This can be
calculated by taking what the firm rate would have been for the
customer and subtracting the quantifiable benefit of the interruptible
load. In the case of Monsanto, I recommend a rate of $22.78 per
MWH which reflects cost-of-service as well as the benefit to the
System of the interruptible provisions of the contract.
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INTRODUCTION 1
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Q. WHAT IS YOUR UNDERSTANDING OF THE HISTORY OF
INTERRUTIBLE RATES ON THIS SYSTEM?

A. It is my understanding that Monsanto has been an interruptible customer
on this System since 1952. During the 24 years that I have been participating in either
UP&L or PacifiCorp cases in Idaho and Utah, the Company has always treated Monsanto
as an interruptible customer. Historically, the Company set rates for Monsanto by simply
taking the variable costs and adding one-half of the fixed costs to serve Monsanto.
Although far more data and computational sophistication is available today for setting
rates, the historical use of only one-half of the demand costs was not an unreasonable
method. That method breaks down when it is applied to interruptible customers that have
different levels of interruptibility, i.e., a customer that can only be interrupted 1% of his
operation should not get the same credit as a customer that can be interrupted 10% of his
operating time.

Q. IS THERE ANY SOUND REASON FOR PACIFICORP’S DRASTIC
SHIFT IN POLICY TO NO LONGER HAVE LONG-TERM INTERRUPTIBLE
CONTRACTS?

A. Not to my knowledge. PacifiCorp has made a unilateral decision to do
away with long-term interruptible contracts in all jurisdictions. To my knowledge, none
of the large interruptible special contract customers have agreed to such a change. These
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large industrial customers have been operating under interruptible rates for a long time.
These interruptible contracts have provided the customers with lower rates and the
System with reduced costs. There has not been a fundamental change in the electric
utility industry that now renders useless these contracts from a System cost point of view.
These interruptible contracts can provide flexibility in operating the System by reducing
the need for purchasing expensive power at times of System peak or reducing the need to
own generation plant sufficient to meet peak load that would include these customers.
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Q. DO YOU AGREE WITH COMPANY WITNESS TAYLOR’S
SUGGESTION1 THAT INTERRUPTIBLE CUSTOMERS AND A “CONTRIBUTION
TO FIXED COST STANDARD” MADE ECONOMIC SENSE AND WERE
ALLOWED ON THE SYSTEM “WHEN THE COMPANY HAD ADEQUATE
CAPACITY, OR WHEN MARKET PRICES WERE WELL BELOW EMBEDDED
COSTS”?

A. No. First, the so-called “contribution to fixed cost standard” was never
employed with regard to interruptible customers solely because the Company had
“adequate capacity or when market prices were well below embedded costs”. A
“contribution to fixed cost standard” simply insures that a special contract customer
(interruptible or economic incentive) pays an amount sufficient to cover more than
variable cost.

1 Taylor’s direct testimony page 5, line 18 through page 6, line 4.
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Second, the suggestion that interruptible rates are only appropriate when the
Company has adequate capacity or when market prices are well below embedded costs is
more appropriately aimed at economic incentive contracts or contracts where customers
have alternative energy supplies. Interruptible customers, by their vary nature, are a
completely different entity. The Company’s arguments blur these two distinctively
different types of contracts. Monsanto and other interruptible customers are providing a
benefit to the System by lowering overall costs—less expensive peak power purchased
and/or less peaking facilities required. The benefit provided by economic incentive
contracts is to simply use up some available electricity that otherwise would not be
generated, and thus, not used if the rates are not low enough.
Third, interruptible customers have been on the System through times of adequate
capacity and times when capacity was short. During the late 1970’s and early 1980’s
there was a great deal of growth on the UP&L System that resulted in the addition of the
Bridger, Huntington, and Hunter units. Interruptible customers continued to be of value
to the Company at that time, and in fact, the Interruptible Irrigation program was initiated
during that timeframe.

Q. THE IRRIGATORS RECENTLY STIPULATED TO THE REMOVAL
OF THE INTERRUPTIBILITY PROGRAM FOR IRRIGATORS. DOES THIS ADD
ANY CREDIBILITY TO THE COMPANY’S CLAIMS THAT LONG-TERM
INTERRUPTIBLE RATES ARE NO LONGER NECESSARY OR APPROPRIATE?

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A. No. The Stipulation in Case No. PAC-E-02-1 made all service to
Irrigation customers firm and called for a study to develop some sort of interruptible
provisions for large Irrigation customers that get little or no BPA credit. The agreement
should not be viewed as a long-term shift in philosophy, but merely a pragmatic result.
With the large BPA credit that will generally be available to Irrigation customers, there
was less concern about lowering rates through the use of an interruptibility credit.
However, when the present BPA credit goes away, there may well be a dramatic need to
find ways to reduce Irrigation rates through the offering of an interruptibility program. If
the Irrigation customers can provide a cost savings to the Company through the use of an
interruption program, then this may be one way to help keep utility costs under control
and farmers using their irrigation equipment.
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SYSTEM VS. SITUS TREATMENT 1
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Q. IS SYSTEM OR SITUS TREATMENT MORE APPROPRIATE FOR
INTERRUPTIBLE CUSTOMERS?

A. System treatment has become the appropriate treatment for the Monsanto
interruptible load. Over 20 years ago the Company pushed to make all interruptible loads
System as opposed to Situs in order to “correct” some inter-jurisdictional allocation
problems. In this case the Company is now proposing to “correct” inter-jurisdictional
allocation problems by providing only firm special contracts to customers and treating
them as Situs. The Company’s present position is unclear regarding the use of Situs
treatment, if these special contract customers retain their interruptibility. If the Company
believes that interruptible customers should be treated as System customers then I concur.
However, if the Company believes that all interruptible customers should be treated as
Situs, then I disagree.
During the last 20 or so years, the Company has treated some firm special
contract customers as System customers as well as all interruptible special contract
customers. The establishment of firm special contract rates has been based upon a
variety of reasons including economic incentives. It is not hard to imagine situations
where one jurisdiction would question the System benefit of reduced rates that are given
to firm special contract customers by a different jurisdiction when all jurisdictions were
required to share in any revenue shortfall. However, interruptible rates are markedly
different. Although there may be some argument over the exact amount, I believe that
most regulators would agree that there is a cost reduction/benefit associated with
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interruptible customers. This benefit flows to the Company as a whole and is not limited
to the jurisdiction in which the customer is located. If interruptible customers are truly
System resources and their revenue requirements are set accordingly, then they should
get System treatment.

Q. IS PACIFICORP PROPOSING TO DO AWAY WITH ALL SYSTEM
CUSTOMERS AND THE USE OF THE REVENUE CREDIT APPROACH FOR
THESE CUSTOMERS?

A. No. PacifiCorp has not proposed to change its present treatment of
Wholesale customers as System customers where no costs are assigned to these
customers. Wholesale sales fall under the regulation of the FERC, yet PacifiCorp is not
proposing Sitas treatment of these contracts into the FERC Jurisdiction. These
Wholesale sales consist of both firm and opportunity sales. The Company claims that
these sales are made for the benefit of the System. Interruptible sales also benefit the
System.

Q. OTHER THAN PROVIDING AN OBVIOUS SYSTEM BENEFIT, IS
THERE ANOTHER REASON WHY MONSANTO SHOULD BE TREATED AS A
SYSTEM CUSTOMER?

A. Yes. Situs treatment of an interruptible load made more sense historically
when “half of the demand costs” were allocated/assigned to interruptible loads. Under
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such a scheme there was a more precise link between jurisdictional allocations and the
revenue collected from interruptible customers. There is not a precise allocation method
that exists today for the establishment of interruptible rates that can be tied to
jurisdictional allocations. Presently, interruptible rates are more based upon System
benefits and less on the allocation of costs. The Idaho jurisdiction is simply too small to
realistically treat Monsanto’s interruptible load as Sitas when assigning revenue
requirement on the basis of System benefits. If Monsanto was going to be treated as a
firm customer, Sitas treatment may be more appropriate. However, both PacifiCorp and
Monsanto agree that Monsanto will be interrupted—the argument is only over the form,
term, and price of the contract(s). Only in the rarest of circumstances will Monsanto be
interrupted just for the sake of the Idaho Jurisdiction. Rates should be based upon the
benefits of the interruptibility that Monsanto provides to the System, not just the benefits
to the Idaho Jurisdiction.
Under Situs treatment, if the credit for interruptibility that is given to Monsanto is
only based upon the benefits to Idaho, then Monsanto’s rates will be too high. If, on the
other hand, Monsanto’s interruptibility credit is based upon the benefits provided to the
System, yet it is assigned Sitas to the Idaho jurisdiction, then the other Idaho customers
could be asked to make up a jurisdictional shortfall that does not exist on a System basis.

Q. DOES SITUS TREATMENT OF THE MONSANTO INTERRUPTIBLE
LOAD MAKE MORE SENSE GIVEN THE SRP PROCESS THAT IS PRESENTLY
UNDERWAY?

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A. No. It certainly does not make sense at this time to use the SRP process as
a cornerstone for advocating Sitas treatment, especially when the SRP process is a long
way from being concluded. Before the SRP process could make Sitas treatment of
interruptible loads appropriate, it would have to overcome the inequity described above
of an interruptible customer providing a System benefit, yet being allocated to a specific
jurisdiction. If the SRP process can adequately resolve this inequity, then the question of
System vs. Situs treatment of the interruptible Monsanto load can be treated at that time.

Q. IS THERE A THIRD ALTERNATIVE TO THE TREATMENT OF
MONSANTO OTHER THAN THE SYSTEM OR SITUS APPROACH?

A. Another option would be to treat Monsanto as its own jurisdiction or as a
part of a jurisdiction with only interruptible customers. In this way the Idaho Jurisdiction
would not be inappropriately saddled with more interruptible load than it can reasonably
use for its own purposes. Likewise, it would not impact other jurisdictions through the
revenue credit method that is presently used. The draw back to such a proposal is that it
does not get to the root question—how to establish an appropriate credit for
interruptibility that will be passed on to the customer in the form of lower rates. That is
the single largest question that the Commission will need to address in this case and in
the SRP process with respect to interruptible load.
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LONG-TERM INTERRUPTIBILTY CONTRACTS 1
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Q. IS PACIFICORP PROPOSING TO DO AWAY WITH
INTERRUPTIBILITY CONTRACTS ENTIRELY?

A. No. PacifiCorp recognizes that it will need to interrupt Monsanto and
other loads in the future. What is at question is how to establish contracts for
interruptibility. PacifiCorp is proposing that interruptible provisions be negotiated
separately and on more of a short-term, as needed basis. This is a fundamental change
from the way things have been done historically. Change isn’t necessarily bad, but it
should not be imposed unilaterally. Monsanto and the other interruptible customers tend
to Utah prefer long-term interruptible contracts as opposed to the case-by-case
agreements that PacifiCorp is proposing. Business interests (including farming) need
certainty. PacifiCorp’s proposal gives the customer no certainty.
Rates that are established in rate cases give customers certainty and stability
which greatly aids in their understanding and ultimate use of electricity. Long-term
contracts do much the same for large energy users. To the maximum extent possible, this
removes fluctuations from year to year or even month to month.

Q. COMPANY WITNESS TAYLOR STATES2 THAT THE DRASTIC
CHANGES IN THE WHOLESALE MARKET OVER THE LAST COUPLE OF
YEARS HAVE SHOWN THAT INTERUPTIBILITY CAN HAVE VERY DIFFERENT
VALUES AT DIFFFERENT POINTS IN TIME. IS THIS SUFFICIENT

2 Taylor direct testimony page 7 lines 8 through 12.
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JUSTIFICATION FOR ONLY SETTING INTERRUPTIBLE RATES IN SHORT-
TERM AGREEMENTS?

A. No. Although wholesale prices have dramatically changed over the last
few years, this is not a sufficient reason to only provide for interruptibility in short-term
agreements. The need to impose interruptions has always varied. There are no two years
that are exactly alike and routinely there have been wide fluctuations from year to year.

Q. WILL SHORT-TERM AGREEMENTS MAKE COST ALLOCATION
AND REVENUE REQUIREMENT CONSIDERATIONS IN RATE CASES EASIER?

A. No, they will be more complicated. For example, if there were a large
number of short-term agreements for interruptions during a given year, there would be a
need to normalize these out. In a similar manner, there would be a need to normalize if
there were too few. But how does one normalize prices and interruptions when the
wholesale market can change so dramatically? In the long run, it is easier to set long-
term interruptible conditions and prices in a contract that is Commission approved, than it
is to continually negotiate short-term contracts that will all need to be normalized at some
point anyway. If prices go completely out of kilter, it may be necessary to obtain
additional special short-term deals, but for the long-run there should be long-term
interruptibility contracts that are cost justified.

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Q. COMPANY WITNESS TAYLOR ARGUES3 THAT INTERRUPTIBLE
PROVISIONS REDUCE THE NEED FOR THE COMPANY’S PEAKING CAPACITY
BUT DO NOT OFFSET THE NEED FOR BASE LOAD CAPACITY. DO YOU
AGREE?
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A. Generally speaking, this is a valid statement. However, it does not mean
that interruptible contracts are not needed during a time when only base load facilities are
being installed. This could be a sign that the very nature of the interruptible contracts
may be working well, such that peaking capacity is being obtained from interruptible
loads.
More importantly, we are now in a time where the Company has just added
peaking facilities in Utah. Obviously, the Company is looking for additional ways to
meet its peaking requirements. Now would seem to be a good time to be adding more
interruptible contracts, not the time to be eliminating them.

3 Taylor direct testimony page 5, lines 9-11.
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PRICING INTERRUPTIBLE POWER 1
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Q. WHAT IS THE MOST IMPORTANT PRINCIPLE IN THE
ESTABLISHMENT OF RATES FOR INTERRUPTIBLE SERVICE?

A. Unlike economic incentive contracts, interruptible contracts should be
based upon cost-of-service and cost causation principles. Admittedly, cost-of-service is
more difficult to define for an interruptible customer than it is for a firm customer, but
this is no excuse to abandon cost causation principles. Interruptible customers provide a
benefit to the System and this benefit should be combined with cost-of-service principles
in order to define a revenue requirement.
Although there are many ways to define cost-of-service for an interruptible
customer, I consider a top-down approach to be the most straightforward. A top-down
approach would establish the cost of firm service to the customer and then subtract out
the impact that the interruptible provisions provide to the System.

Q. BOTH MONSANTO AND THE COMPANY HAVE FILED COST-OF-
SERVICE STUDIES WITH DIFFERING ALLOCATION METHODS IN THIS CASE
AND PRODUCED VARIOUS ASSESSMENTS OF WHAT THE FIRM RATE TO
MONSANTO SHOULD BE. WHICH OF THESE STUDIES DO YOU SUPPORT FOR
ESTABLISHING A STARTING POINT (FIRM) RATE FOR MONSANTO?

A. For purposes of this case, I believe that the Company’s cost-of-service
study is the appropriate starting place. Monsanto witness Iverson has proposed a number
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of changes to the Company’s classification and allocation methods. I do not believe any
of these proposed changes should be adopted in this case because:
1) Such changes would have a tendency to serve as precedent for future
proceedings. It would be far more appropriate to set allocation methodologies
in full-blown rate cases where cost-of-service for all classes is reviewed and
where there may be wider participation by various parties.
2) The classification and allocation methods used by the Company have been
generally accepted and/or developed by both the Idaho Commission and the
Utah Commission over a long period of time. As stated above, this is not the
right forum to make wholesale changes to cost-of-service methodologies.
Therefore, I recommend that the starting point for setting rates for Monsanto should be
the firm rate that the Company calculated of $31.40 per MWH.

Q. HOW SHOULD THE BENEFITS OF THE INTERRUPTIONS BE
CALCULATED FOR PURPOSES OF ESTABLISHING AN INTERRUPTION
CREDIT THAT WILL BE SUBTRACTED FROM THE FIRM RATE OF $31.40 PER
MWH?

A. The development of an interruptibility credit is less straightforward than
the calculation of a firm rate, but cost causation principles still apply. As pointed out by
the Company, interruptible contracts reduce the need for peaking capacity. A benefit can
be calculated by determining how much peaking resources can be removed.

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Q. WHAT IS A MEASURE OF THE COST OF PEAKING RESOURCES
AND HOW CAN IT BE USED TO ESTABLISH AN INTERRUPTIBLE CREDIT FOR
MONSANTO?
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A. The Company has recently installed a simple cycle combustion turbine
peaking units in Utah. According to the Company’s RAMPP 6 filing made in 2001, the
total resource cost of a simple cycle combustion turbine in Utah is 89.71 mills per kWh4.
Because the Company just installed such units, and because interruptible contracts can be
an alternative to such units, I will use this as the basis for calculating an interruptible
credit for Monsanto.
Exhibit 301 outlines the calculation of an interruptibility credit, and ultimately, a
rate to charge Monsanto for interruptible service, based upon a proposed 800 hours of
interruption per year. The total resource cost of the peaking unit ($89.71 per MWH) is
increased by 1.0519 in order to reflect losses at the transmission level—the effective
offset to the peaking facility is thus $94.39 per MWH. At an average demand level of
160 MW and 800 hours of interruption per year there would be 128,000 MWH of
interruption when a peaking unit would not be needed. This equates to a savings of $12
million per year. Using the Company’s calculation of a firm service rate to Monsanto of
$31.40 per MWH, the total cost to Monsanto for firm service is $44 million. Subtracting
the savings due to the interruptions of $12 million from the firm cost of $44 million
equates to a cost of $32 million after interruptions are taken into account. Spreading this
over the annual usage results in an average rate of $22.78 per MWH.

4 Table 4-15, page 2 of 2.
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Q. IS THERE ANOTHER WAY TO ESTIMATE AN INTERRUPTIBILITY
CREDIT FOR MONSANTO?

A. Yes. Instead of assuming that interruptions would save the cost of a
peaking facility, one could assume that interruptions could be taken in order to reduce the
cost of purchase power. Although Monsanto’s present contract does not have a provision
for economic interruptions, previous contracts did have such a provision and Monsanto
appears to be willing to have such a provision in its future contracts. Although a single
year of cost savings is not as strong an indicator of an appropriate interruptibility credit, it
can help to set some ballpark parameters.
For the sake of being conservative, I assumed that the Company would not be
selective in its interruptions, but simply evenly divide its interruptions of Monsanto
during the Heavy-Load-Hours (HLH) of June and July. Exhibit 302, page 1 lists the cost
savings in 2000 under such a scheme. Although this was a time of abnormally high
purchase power costs, it can be seen that the price of day-ahead purchase power during
HLH was in fact higher during two other months of that year. Had these interruptions
taken place in June and July of 2000, a savings of over $17 million would have resulted.
Based upon the purchase power costs that could have been saved in 2000, the average
rate for Monsanto with an interruptibility credit would have been calculated at $18.86 per
MWH.
Exhibit 302, page 2 lists the cost savings in 2001 under a similar scheme—blindly
having all interruptions occurring during the HLH of June and July. Although there were
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also abnormally high purchase power costs in 2001, costs were more back to normal by
the summer months. It can be seen from Exhibit 302, page 2 that the cost of day-ahead
purchases during HLH was in fact higher during the first five months of 2001 than they
were during June and July. Had these interruptions taken place in only June and July of
2001, savings of $7 million would have resulted. Based upon these savings in 2001, the
average rate for Monsanto with an interruptibility credit would have been calculated at
$26.46 per MWH.

Q. WHAT CONCLUSION CAN BE DRAWN FROM YOUR ANALYSIS
OF SAVINGS THAT WOULD HAVE RESULTED FROM HAVING
INTERRUPTIBILITY PROVISIONS CAPABLE OF REDUCING PURCHASE
POWER COSTS IN 2000 AND 2001?

A. The information contained on page 1 and 2 of Exhibit 302 tends to set
some rough limits on the level of the savings associated with 800 hours of interruptibility
per year. The data from these two years suggests an average rate for Monsanto of $22.66
per MWH (average of $18.86 and $26.46). This is extremely close to the average rate
with an interruptibility credit of $22.78 that was calculated on Exhibit 301 using the cost
of a peaking unit.
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RECOMMENDATIONS
Q. WHAT DO YOU RECOMMEND WITH RESPECT TO SETTING
RATES FOR MONSANTO IN THIS CASE?

A. I make the following recommendations:
1. Monsanto should be treated as a System customer and not be given
Situs treatment.
2. Interruptible contracts provide the Company with cost savings that can
be of great benefit to the entire System. Those savings should be
quantified and used to develop an interruptibility credit for
interruptible customers. Rates for interruptible customers should be
set no lower than what can be cost justified from the savings that they
provide.
3. A rate of $22.78 per MWH would be an appropriate rate to set for
Monsanto, assuming 800 hours per year of interruptions are allowed in
the contract.

Q. DOES THIS COMPLETE YOUR PREFILED DIRECT TESTIMONY?

A. Yes.