20070928Schettler direct.pdf

RECE!V'::L
BEFORE THE ZOOI SEP 28 Atl 9: 44
PUBLIC UTILITIES COMMISSION UT I L gf~i?d~~jff~ \ ~ S! 0;,
OF THE STATE OF IDAHO
IN THE MATTER OF THE APPLICATION OF
ROCKY MOUNTAIN POWER FOR APPROVAL)
OF CHANGES TO ITS ELECTRIC SERVICESCHEDULES
Case No. PAC-O7-
TESTIMONY OF
DANIEL R. SCHETTLER
Direct Testimony of
DANIEL R. SCHETTLER
On Behalf of
Monsanto Company
September 28, 2007
Testimony of Daniel R. Schettler - Page
ROCKY MOUNTAIN POWER
Before the
Public Utilities Commission
Of the State of Idaho
CASE NO. PAC-O7-
Table of Contents to the
Direct Testimon of Daniel R. Schettler
Page
INTRODUCTION
II.PURPOSE OF TESTIMONY
III.PHOSPHORUS MARKET AND COMPETITION
IV.SODA SPRINGS PHOSPHORUS PRODUCTION AND USE
ELECTRI CITY CURTAILMENT EFFECTS
VI.CAPITAL COMMITMENTS
VII.COMMENTS ON THE PROPOSED RATE INCREASE
Testimony of Daniel R. Schettler - Page 2
INTRODUCTION
PLEASE STATE YOUR NAME,BUSINESS ADDRESS AND
EMPLOYMENT.
Daniel R. Schettler, Monsanto Company, 800 N. Lindburgh Boulevard, St. Louis
Missouri 63167.
WHAT IS YOUR CURRENT POSITION WITH MONSANTO COMPANY
AND WHAT DO YOUR RESPONSmILITIES INCLUDE?
Vice President, Procurement. I am responsible for purchase of raw materials
energy, and goods and services required for the manufacture of Monsanto
products.
PLEASE BRIEFLY DESCRmE YOUR EDUCATIONAL BACKGROUND
AND BUSINESS EXPERIENCE.
I have a degree in economics from Drury University, with graduate work in
finance at Washington University. I have been employed by Monsanto for 40
years and I have worked in virtually every business sector in the company. I have
been responsible for agriculture procurement since 1986, and was named Vice
President of Procurement in 2000.
II. PURPOSE OF TESTIMONY
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
The purpose of my testimony is to: (1) describe the worldwide phosphorus
market; (2) discuss market changes and competitiveness resulting from new
technology and foreign supplies; (3) describe how phosphorus from the Soda
Springs plant is used and marketed; (4) describe why the Soda Springs plant must
Testimony of Daniel R. Schettler - Page 3
remain competitive and viable; (5) describe how electricity curtailments impact
our business; (6) provide the perspective of management in allocating capital; and
(7) provide comments on the proposed rate increase.
III. PHOSPHORUS MARKET AND COMPETITIVENESS
PLEASE DESCRmE THE PHOSPHORUS MARKET IN THE S. AND
WORLDWIDE.
The global phosphorus market has experienced dramatic change in the last
years. What began as an industry concentrated in the United States and Europe
for most of the 20th century has been transformed rapidly into one dominated by
the Chinese. In 1990 the global elemental phosphorus market was 3.5 billion
pounds, 85% of which was produced in Europe and North America. By 2001 the
market had shrunk to 1.6 billion pounds, 75% produced in China. Global demand
is still falling and the Chinese have shut down many small phosphorus furnaces.
These have been replaced with new large efficient furnaces boosting global
capacity to over 3.0 billion pounds in 2006. As a result, Chinese producers are
today operating at a little over 40% of capacity. Outside of China, there are only
two significant phosphorus plants, one in the Netherlands and Monsanto s plant in
Soda Springs, Idaho. When I last presented testimony to the Idaho PUC in 2002
Monsanto s plant was the largest in the world. There wasn t a Chinese producer
with even 25% of our capacity. Today, there are 5 Chinese plants larger than our
Soda Springs plant.
There are two primary reasons for this change - technology and the price
of electricity.
Testimony of Daniel R. Schettler - Page 4
(1) New technology, referred to as the wet acid process, has provided industry
with the phosphorus molecule at a significantly lower cost than the cost of
elemental phosphorus. This has led to the dramatic drop in global demand
for elemental phosphorus.
(2) High priced electricity led to the demise of U.S. and European elemental
phosphorus plants. The new plants in China have low cost power and
many even generate their own power in hydro electric plants.
Electricity represents 30% - 45% of the cost of producing elemental
phosphorus. For Monsanto, electricity is the largest single cost factor, and the
only significant cost outside of our control.
PLEASE DESCRmE HOW CHANGES IN TECHNOLOGY HAVE
AFFECTED THE PHOSPHORUS MARKET AND THE IMP ACTS
EXPECTED IN THE FUTURE FROM NEW TECHNOLOGY.
On a global basis 75% of elemental phosphorus is used to make thermal
phosphoric acid. The remaining 25% is used to produce derivative products, the
largest being phosphorus trichloride, one of the raw materials Monsanto uses to
manufacture glyphosate herbicide. The wet acid process is an alternate, lower
cost route to phosphoric acid. Its use has grown dramatically and will continue to
grow in the future. The wet acid process is not suitable as a replacement for the
25% of elemental phosphorus used for derivative products. New technology has
resulted in a reduction in the overall demand for elemental phosphorus. As this
trend continues, less efficient phosphorus producers will be forced to cease
operations.
Testimony of Daniel R. Schettler - Page 5
While overall global demand for elemental phosphorus is flat at best, the
portion sold to the derivative products market is growing modestly. This includes
Monsanto s phosphorus trichloride, used to manufacture glyphosate.
PLEASE DESCRmE HOW FOREIGN SUPPLIERS HAVE AND ARE
EXPECTED TO IMP ACT THE PHOSPHORUS MARKET IN THE
FUTURE.
Historically, U.S. demand for phosphorus was supplied by U.S. sources with
some imports from Europe. Today, U.S. demand is met either by Monsanto or by
the Chinese. Because of their cost position, the Chinese sell phosphorus delivered
to the U.S. at very low prices, often below Monsanto s manufacturing cost at
Soda Springs. The Chinese will continue to gain market share in the U.S. and
elsewhere. Given the substantial excess capacity that exists in China, along with
the large number of producers, pricing of elemental phosphorus is not expected to
increase dramatically in the future.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE
SODA SPRINGS PLANT COMPARED WITH OTHER SUPPLIERS?
Soda Springs is the most technically advanced, safest and environmentally
responsible plant in the world. It has the advantage of being a more reliable
source.. It has a highly motivated and competent work force. Soda Springs
operates efficiently and has higher safety and environmental standards than any
phosphorus plant in the world. All of this comes at higher operating costs than
our Chinese competition. Monsanto has its own mine leases which provide
phosphorus ore. We have many different approved sources for our coal and coke
Testimony of Daniel R. Schettler - Page 6
requirements and competitively bid this business to maintain the lowest possible
cost. Electricity is the only input over which we have no control. Unfortunately
it is our largest cost factor.
IV. SODA SPRINGS PHOSPHORUS PRODUCTION AND USE
HOW IS PHOSPHORUS FROM THE SODA SPRINGS PLANT USED BY
MONSANTO?
The Soda Springs plant ships phosphorus to Monsanto plants in Luling, Louisiana
and Camacari, Brazil.There we convert the phosphorus to phosphorus
trichloride, a raw material required to produce glyphosate.The resulting
glyphosate intermediate is then shipped from each of these locations to plants
around the world where the final products are formulated for the local agricultural
markets.
IS PHOSPHORUS PRODUCED AT THE SODA SPRINGS PLANT ALSO
MARKETED TO OTHER END USERS?
Phosphorous not used internally by Monsanto is sold on a long-term cost based
agreement to ICL Industries who in 2005 purchased Astaris, (the joint venture
between FMC and Solutia) This phosphorus is used in the U.S. for a variety of
derivative products for the food and industrial markets. A small quantity of
phosphorus is sold to Thermphos International who purchased Solutia s Dequest
business in May, 2007.
IS PHOSPHORUS PRODUCED FROM THE SODA SPRINGS PLANT
UNIQUE OR DIFFERENT FROM PHOSPHORUS PRODUCED FROM
Testimony of Daniel R. Schettler - Page 7
OTHER SOURCES?IF SO, HOW DOES THE END USE OF
ELEMENTAL PHOSPHORUS PRODUCED BY THE SODA SPRINGS
PLANT DIFFER?
The phosphorus produced at Soda Springs is of very high quality and is similar to
the phosphorus produced in Europe. Much of the phosphorus in China is of low
quality and is used locally for fertilizer. However, all new capacity in China is
high quality and functionally equivalent to the Soda Springs and European
phosphorus, and competes in the same markets.
The Soda Springs phosphorus plant is unique in the world. All other
plants have had to sell most of their output into markets where competition from
wet acid" phosphoric acid has eroded their profitability. Eventually they shut
down one furnace, causing costs to escalate which makes them even less
competitive. The death spiral continues until they are out of business. All
remaining phosphorus producers are faced with these conditions. The Chinese
will survive because of their cost position.
The business model for Soda Springs is unique and has been successful for
years. More importantly, it is sustainable. There are two components:
1) The foundation of the model is a state of the art plant that is cost effective and
operating at capacity 365 days a year. Soda Springs is the most technically
advanced, safest and environmentally responsible plant in the world. It is the
only plant which meets the highest standards of OSHA VPP Star, Bureau of
Land Management and ISO 9002. Though not the lowest cost phosphorus
plant, Soda Springs can compete given today s cost structure.
Testimony of Daniel R. Schettler - Page 8
2) The vast majority of Soda Springs phosphorus goes to end markets that cannot
use "wet acid" as a replacement. Monsanto s internal use of the phosphorus is
for the growing glyphosate market. ICL'share for derivative products is
growing modestly. As Monsanto requirements grow, phosphorus
withdrawn from other customers. This allows Soda Springs to operate at
capacity and achieve the lowest manufacturing cost.
FROM MANAGEMENT'S PERSPECTIVE WHY MUST PHOSPHORUS
PRODUCED AT THE SODA SPRINGS PLANT REMAIN COMPETITIVE
WITH OTHER SOURCES.
The vast majority of phosphorus from Soda Springs is used by Monsanto to
produce phosphorus trichloride, the raw material used to produce glyphosate sold
by Monsanto as RoundupQY. This market grew at double-digit rates for twenty
years. Monsanto fueled this growth by reducing the selling price for RoundupQY
herbicide. In the ten years from 1993 to 2002 we reduced the price of glyphosate
globally by over 60%.This made the herbicide affordable for many new
applications and Monsanto maintained profitability from the resulting growth in
volume. By 2000 market growth had stalled as the market became saturated. Our
glyphosate profits have fallen steadily ever since.
During this same time period the Chinese actively entered the glyphosate
business building over 70 small plants around their country. Today 6-8 major
producers have emerged and the Chinese have captured 30% of the global
glyphosate market.
Testimony of Daniel R. Schettler - Page 9
Monsanto has planned for the reduction in glyphosate profits and is
focusing on seed business for future growth in profits. Still, glyphosate is a
critical element of Monsanto s product portfolio offered to farmers.To be
successful in the future, we will run the business to achieve the lowest possible
We have globally sourced raw materials to reduce cost.We havecost.
implemented new technologies to reduce cost. We have constructed new plants in
other world areas to reduce cost. We have outsourced to reduce cost. We have
consolidated business and changed suppliers to reduce cost. We have purchased
phosphorus and glyphosate from the Chinese. Weare analyzing every element of
Soda Springs cost to effect reductions while still maintaining the highest
standards of manufacturing operations.
Today, Monsanto can buy phosphorus from China at competitive prices.
We have used alternate phosphorus for our glyphosate production.We can
deliver the phosphorus to our downstream locations in Louisiana and Brazil at
lower cost than from our own production at Soda Springs. Ultimately, if Soda
Springs cannot remain competitive, Monsanto will have no alternative but to
purchase phosphorus from others. The productivity of our people continues to
improve. The quality of our mining operation continues to improve, and our
capital investments help maintain our cost position. Only electricity is outside of
Monsanto s control in this equation, and it is a huge portion of our total cost.
Given a stable and reasonably priced supply of electricity, the Soda. Springs plant
can remain a competitive source of phosphorus for Monsanto.
Testimony of Daniel R. Schettler - Page 1 a
WHAT ALTERNATIVES DOES MONSANTO HAVE AVAILABLE TO
MEET ITS NEEDS IF PHOSPHORUS FROM THE SODA SPRINGS
PLANT IS NO LONGER PRICE COMPETITIVE?
Monsanto has relationships with other phosphorus suppliers who have committed
to meet our requirements, should the need arise. We have tested and approved
this material. Pricing is attractive. Given the global overcapacity that exists
today, Monsanto would be able to secure the volume needed for our glyphosate
business. However, this alternative would reduce or eliminate the need for
Monsanto to operate the Soda Springs plant.
DOES THE ENTRANCE OF CHINESE PRODUCERS INTO THE
GLYPHOSATE MARKET IMPACT THE LONG-TERM VIABILITY OF
THE SODA SPRINGS PLANT?
As with phosphorus, the Chinese are selling glyphosate into the world market at
low prices. In order to test quality and supplier capabilities, Monsanto buys and
uses Chinese glyphosate for some of our operations in South America. The
quality is satisfactory and functionally equivalent to Monsanto s glyphosate.
Monsanto s advantage is years of operating experience, cutting edge technology
and scale. Our huge production capability allows Monsanto to enjoy a favorable
glyphosate cost position relative to all Chinese producers. But, if Monsanto s cost
advantage is lost, we will be forced to source large quantities of glyphosate from
China, negatively impacting the operations of the Soda Springs plant. Electricity
is the only significant input we are forced to buy without the advantage of the
competitive bid process, and the largest threat to our cost position.
Testimony of Daniel R. Schettler - Page 11
V. ELECTRICITY CURTAILMENTS EFFECTS
HOW DO THE ELECTRICTY CURT AILMENTS IN THE CURRENT
CONTRACT IMPACT THE BUSINESS?
Every curtailment negatively impacts our business operations, with the exception
of net electricity price benefits.Curtailments increase costs and reduce
production, operational efficiencies and reliability. Because the curtailments must
be taken on little or no notice, and are difficult to predict from day to day or
month to month, it is often impossible to avoid inefficiencies and the associated
production losses. The Soda Springs plant operates 24 hours a day, 365 days a
year. To be viable today and into the future, we must operate all three of our
furnaces at maximum capacity. Lost production can never be made up. Supply
short falls must be purchased from other sources. Operating costs are spread
across fewer pounds of produced phosphorus, thus increasing our per pound cost
of phosphorus from the plant.
IS MONSANTO ABLE TO ABSORB MORE INTERRUPTIONS IN
ORDER TO ACHIEVE A LOWER NET PRICE?
No. The 1000 hours of interruptions under the current contract are the most
Monsanto could tolerate, given the current customer demand and supply mix.
Any greater interruptions would not only disrupt plant operations but also raise
the per-pound cost of phosphorus to unacceptable levels. Our preference would
be to reduce the hour3 of interruptions, particularly if we cannot achieve proper
value for extra hours.
Testimony of Daniel R. Schettler - Page 12
VI. CAPITAL CO MMITTMENTS
EXPLAIN HOW MANAGEMENT ALLOCATES CAPITAL
OPERATING BUSINESS SEGMENTS.
Monsanto develops its long-term capital plan based on the return that will be
generated by the various projects. We always have more projects than cash
available, so we prioritize the alternatives. Of fIrst priority are environmental
safety and compliance projects. Next, we look at all projects that generate a
return higher than our weighted average cost of capital (11-l2%). High return
projects get funded, while low return projects usually do not.
EXPLAIN SOME OF THE RECENT AND FUTURE MAJOR CAPITAL
COSTS NECESSARY TO OPERATE THE SODA SPRINGS PLANT AND
MINING OPERATIONS.
Major capital expenditures consist of plant improvements, environmental
resource acquisitions and mining plans. Since 2005 Monsanto has invested over
$30 million in capital projects at Soda Springs for exploration and new mine
development, heavy equipment, furnace upgrades, process improvement
environmental compliance and cost improvement projects. Our capital plan for
2008 through 2010 requests corporate funding of an additional $30 million for the
Soda Springs plant. The benefits of these projects often are not felt for 5 or more
years. In the case of mining exploration, these projects may not bring value to
Monsanto for over 1 a years.
EXPLAIN WHY PRICE CERTAINTY AND STABILITY IS IMPORT ANT
TO MONSANTO'S DECISION-MAKING PROCESS.
Testimony of Daniel R. Schettler - Page
Monsanto is not a monopoly nor does it get a guaranteed rate of return on
investments. The Soda Springs plant is a capital-intensive facility. Phosphorus
production requires long-term planning and millions of dollars of capital
investment. These investments must be made as much as 1 a years in advance of
their value creation. Also, because most of our work force is highly skilled and
well paid, it takes years of training and development to maximize the value of our
people.
New investments are needed to develop ore deposits for the future and
install the next generation of environmental equipment to ensure compliance with
ever-more stringent environmental regulations, a cost our Chinese competitors do
not have. To justify these investments, Monsanto must be able to have reasonable
assurance that Soda Springs can remain in a competitive cost position.
VII. COMMENTS ON THE PROPOSED RATE INCREASE
GIVEN THE FACT THAT MONSANTO'S FIRM RATES JUST
INCREASED 16.5% EFFECTIVE JANUARY 1, 2007, ARE YOU
SHOCKED TO LEARN THAT PACIFICORP IS REQUESTING AN EVEN
LARGER 24.1 % INCREASE IN FIRM LESS THAN A YEAR LATER?
As a part of the negotiations which resulted in the 2007 Contract, Monsanto
agreed to a $6.8 million increase, a substantial 16.5% increase in the rate
previously paid. Because the rate increase was the result of negotiation and
compromise, we believed PacifiCorp was in agreement that Monsanto would now
be shouldering a fair, just and reasonable share of PacifiCorp s operating costs.
While we were aware under the terms of the new Contract that rate stability was
Testimony of Daniel R. Schettler - Page 14
only guaranteed for one year and that PacifiCorp could file a new general rate
case changing our new tariff-based rates after January 1 , 2008, I was surprised
and shocked to learn of PacifiCorp s proposal to increase our rates by 32.9% just
one year later. While PacifiCorp s filing claimed Monsanto s increase would be
24.1 %, our calculations indicate our net rates, after the credit for the 1 000 hours
of interruptions, would increase from $25.55 per MWH to $33.96 per MWH, or
32.9%.The so-called "natural hedge" we were promised, whereby firm rate
increases would be substantially offset by increases in the interruptibility value
certainly would not be achieved under PacifiCorp s proposal. It seems clear to
me now that PacifiCorp was willing to make any commitment necessary to get
Monsanto s support for their merger and movement to tariff rates, all the time
intending to pass along enormous increases as soon as they could implement a
rate case in Idaho. It is particularly troublesome that PacifiCorp is requesting a
disproportionate and substantially larger increase for Monsanto than for other
customers. Had we known then that they were not negotiating in good faith
Monsanto would never have agreed to the current contract.
DO YOU THINK MONSANTO'S PRICES ESTABLISHED JANUARY 1,
2007 UNDER THE CURRENT CONTRACT WERE NOT PAYING
MONSANTO'S FAIR SHARE OF P ACIFICORP'S COSTS?
No. We thought the prices that became effective January 1 2007 were agreed to
by both parties as fair, just and reasonable.Further, that any future price
increases would be based on any increases in PacifiCorp s operating costs
incurred after January 1 , 2007.
Testimony of Daniel R. Schettler - Page
PLEASE DESCRmE WHAT EFFECT THE PROPOSED 32.
INCREASE IN MONSANTO'S NET PRICE WOULD HAVE ON THE
CONTINUED VIABILITY AND OPERATION OF THE SODA SPRINGS
PLANT.
The proposed increase is totally unacceptable to Monsanto. As I previously
testified, Monsanto must have reliable, predictable and affordable power for Soda
Springs to remain viable. Monsanto fully intends to continue to invest in Soda
Springs as an important long-term and reliable source of phosphorus, provided we
have a reasonable expectation the supply will be reliable and price competitive in
both the short and long term. PacifiCorp s proposed firm rate increase of 24.1 %,
and overall net rate increase of 32.9%, on the back of a 16.5% increase on January
, 2007 certainly does not meet the test of providing fair, just and reasonable
rates.
JIM SMITH EXPLAINED IN HIS TESTIMONY, PAGES 17-18 WHY
MONSANTO AGREED TO MOVE FROM CONTRACT TO TARIFF
BASED RATES. DO YOU NOW HAVE CONCERNS ABOUT HAVING
RATES PERIODICALLY CHANGED IN GENERAL RATE CASE
PROCEEDINGS?
Yes. Judging by what we have seen so far, I am very concerned that Monsanto
will now be subjected to frequent and substantial price changes over which we
will have little or no control. I have serious questions now that we have received
the benefit of our bargain. I am hopeful the Commission will appropriately value
Testimony of Daniel R. Schettler - Page 16
the 1000 hours of curtailment we have given up to substantially offset any
increase in our firm rates.
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes.
Testimony of Daniel R. Schettler - Page