20101014Lawrence Di.pdf

BEFORE TH
RECEl\/ECl
ZU100CT i It Attl I: 36
PUBLIC UTILITIS COMMISSION
OF TH STATE OF IDAHO
IN THE MATTER OF THE APPLICA nON OF
ROCKY MOUNTAIN POWER FOR APPROVAL
OF CHANGES TO ITS ELECTRIC SERVICE
SCHEDULES
Direct Testimony of
KEVI P. LAWRNCE
On Behalf of
Monsanto Company
October 14, 2010
)
) Case No. PAC-E-IO-07
)
)
ROCKY MOUNAI POWER
Before the
Public Utilities Commission
Ofthe State of Idaho
CASE NO. PAC-E-IO-07
Table of Contents to the
Direct Testimony of Kevin P. Lawrence
Page
i.INTRODUCTION 1
II.PUROSE OF TESTIMONY 2
III.PHOSPHORUS MARKT AND COMPETITION 2
iv.SODA SPRINGS PHOSPHORUS PRODUCTION AND USE 5
v.CAPITAL COMMITMENTS 7
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I.INRODUCTION
4 Q PLEASE STATE YOUR NAM, BUSINSS ADDRESS AN
5 EMPLOYMNT.
6 A Kevin P. Lawrence, Monsanto Company, 800 N. Lindbergh Boulevard, St. Louis,
7 Missouri 63167.
8 Q WHT IS YOUR CURNT POSITION WIH MONSANO COMPAN
9 AN WHT DO YOUR RESPONSmILITIES INCLUDE?
lOA Vice President, Procurement, Engineering and Supply Chain. In addition to other
11 duties, I have overall responsibilities for the purchase of raw materials, energy and
12 goods and services required for the manufacture of Monsanto products at its
13 production locations which includes the Soda Springs Plant.
14 Q PLEASE BRIFLY DESCRmE YOUR EDUCATIONAL BACKGROUN
15 AN BUSINSS EXPERINCE.
16 A I have a degree in Chemical Engineering from The University of Tennessee and
17 an MBA from Washington University in St Louis. I have been employed by
18 Monsanto for 30 years and I have worked in virtually every business sector in the
19 company. I have been responsible for the procurement of Monsanto raw
20 materials and energy since June 2008.
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ß. PUROSE OF TESTIONY
WHT is TH PUROSE OF YOUR TESTIMONY?
The purpose of my testimony is to: (l) describe the worldwide phosphorus
market; (2) discuss market changes and competitiveness resulting from changes in
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
remain competitive and viable; (5) provide a Monsanto perspective on the
glyphosate business; and; (6) provide the perspective of management in allocating
capitaL.
ID. PHOSPHORUS MAT AN COMPETITIVNESS
PLEASE DESCRmE THE PHOSPHORUS MAT IN TH U.S. AN
WORLDWIE.
The global phosphorus market has experienced significant change in the last 20
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 bilion
pounds, 85% of which was produced in Europe and North America. By 2001 the
market had shrunk to 1.6 billon pounds, 75% produced in China. Global demand
is stil fallng and the Chinese have shut down many small phosphorus furnaces
driven by lack of efficiency and inherent environmental concerns. However, this
older capacity has been replaced with new, larger and more effcient furnaces
boosting China's capacity to over 2.0 bilion pounds today operating at about 45%
Lawrence, DI - Page 2
1 of capacity. Outside of China, there are only three significant phosphorus plants,
2 one in the Netherlands, one in Kazakhstan and Monsanto's plant in Soda Springs,
3 Idaho. In 2002, Monsanto's plant was the largest in the world. There wasn't a
4 Chinese producer with even 25% of our capacity. Today, there are stil about 80
5 plants in production and several Chinese plants are larger than our Soda Springs
6 plant, with the largest facility possessing capacity one and one half times the size
7 of Soda Springs
8 There are two primary reasons for this change - technology and the price
9 of electricity.
10 (1) Alternate technology, referred to as the wet acid process, has provided
11 industry with the phosphorus molecule at a significantly lower cost than
12 the cost of elemental phosphorus. This has led to the dramatic drop in
13 global demand for elemental phosphorus.
14 High priced electricity led to the demise of most U.S. and European elemental
15 phosphorus plants. The new plants in China have low costs and many even
16 generate their own power in hydro electric plants.
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WHT PART OF THE COSTS OF PRODUCING ELEMENTAL
PHOSPHORUS DOES ELECTRICITY REPRESENT?
Electricity represents approximately 20-30% of the cost of producing elemental
phosphorus. For Monsanto, electrcity is the largest single cost factor, and the
only significant cost outside of our control.
Lawrence, DI - Page 3
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PLEASE DESCRmE HOW FOREIGN SUPPLIERS HAVE AN AR
EXPECTED TO IMPACT THE ELEMENTAL PHOSPHORUS MAT
IN TH FUUR.
Historically, U.S. demand for elemental phosphorus was supplied by U.S. sources
with some imports from Europe. Today, U.S. demand is primarly met either by
Monsanto or by the Chinese. Because of their cost position, the Chinese sell
elemental phosphorus delivered to the U.S. at very competitive prices. With their
current electricity, labor and environmental cost advantages coupled with excess
capacity, the Chinese wil likely continue to gain market share at the expense of
Monsanto. Additionally, due to the available excess capacity, pricing of elemental
phosphorus is not expected to increase significantly in the foreseeable future.
DOES PHOSPHORUS PRODUCED AT THE SODA SPRIGS PLAN
OFFR ADVANTAGES?
No, elemental phosphorus is generally viewed as a commodity product by our
customers. The Soda Springs plant offers certain advantages to Monsanto
because it is the most technically advanced, safest and most environmentally
responsible plant in the world. It is the only elemental phosphorus plant which
meets the highest standards of OSHA vpp STAR, Bureau of Land Management,
and iSO 9002. It is a well maintained and highly invested facilty providing the
customer advantage of being a very 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. Monsanto
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1 has its own mine leases which provide phosphate ore. These leases are managed
2 and the mines are operated under the most stringent environmental and safety
3 requirements. All of this comes at higher operating costs than our Chinese
4 competition.
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6 Q WHT ACTION HAS MONSANTO TAKN TO REMA COST
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8 COMPETITIV?
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10 A To be successful in the future, Monsanto wil operate the Soda Springs plant to
11 achieve the lowest possible cost. To manage input costs, Monsanto has contracted
12 with many different sources for our coal and coke requirements, which were
13 competitively bid to maintain the lowest possible cost. We have globally sourced
14 raw materials to reduce cost. Weare consistently working to improve our
15 processes and reduce waste. At Soda Springs we are analyzing every element of
16 cost to effect reductions while stil maintaining the highest standards of
17 manufacturing operations. Electricity is the only input over which we have no
18 control. Unfortnately, it is our largest single cost factor.
19 IV. SODA SPRIGS PHOSPHORUS PRODUCTION AN USE
20 Q HOW IS PHOSPHORUS FROM THE SODA SPRIGS PLANT USED BY
21 MONSANO?
22 A The Soda Springs plant ships phosphorus to Monsanto plants in Luling, Louisiana
23 and Camacari, BraziL. There we convert the phosphorus to phosphorus trichloride,
24 a raw material required to produce glyphosate. The resulting glyphosate
Lawrence, DI - Page 5
1 intermediate is then shipped from each of these locations to plants around the world
2 where the final products are formulated for the local agricultural markets.
3 Q DOES THE ENTRACE OF CHINSE PRODUCERS INTO TH
4 GLVPHOSATE MAT IMACT TH LONG-TERM VIILITY OF
5 TH SODA SPRIGS PLAN?
6 A As with elemental phosphorus, the Chinese are sellng glyphosate into the world
7 market at low prices. Their quality is satisfactory and functionally equivalent to
8 Monsanto's glyphosate. Monsanto's glyphosate production advantage is years of
9 operating experience, cutting edge technology and scale. Our production capability
10 allows Monsanto to enjoy a competitive glyphosate cost position relative to
11 Chinese producers. But, if Monsanto's competitive glyphosate cost position is lost,
12 sourcing from China could occur, negatively impacting the operations of the Soda
13 Springs plant.
14 Q WHT RECENT ACTION BY THE CHSE AFCTED THE
15 GLVPHOSATE MAT?
16 A. Over the past two years the Chinese flooded the market with very low priced
17 generic glyphosate. Many of our far customers purchased the lower priced
18 Chinese product and Monsanto's sales rapidly declined. In addition, our Roundup~
19 herbicide gross profit, which had peaked in 2008, declined by seven percent in
20 2009 and an additional 92% in 2010. The changes that occurred in the global
21 glyphosate market, including oversupply from Chinese producers, have created a
Lawrence, DI - Page 6
significant compression in the manufacturer's margin. We believe that the market
2 changes are permanent and wil therefore have a long term impact on the level of
3 cost absorption and profits that can be generated by this business. Since electricity
4 is the only significant input that we are forced to buy from a monopoly supplier, it
5 is the largest threat to our cost position and a key threat to the viability of the Soda
6 Springs plant.
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FROM MAAGEMENT'S PERSPECTIV, WH MUST PHOSPHORUS
PRODUCED AT TH SODA SPRIGS PLANT REMA COMPETITIV
WITH OTHER SOURCES.
Today, Monsanto can buy near equivalent quality phosphorus from China at
competitive prices that can be used for our glyphosate production. If Soda Springs
cannot remain competitive, Monsanto management wil have no alternative but to
purchase phosphorus from least cost sources to remain competitive and to
14 successfully serve our far customers.
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v. CAPITAL COMMTTMNTS
EXPLAI SOME OF THE RECENT AN FUUR MAJOR CAPITAL
COSTS NECESSARY TO OPERATE THE SODA SPRIGS PLANT AN
MIG OPERATIONS.
Since 2005 Monsanto has invested over $70 milion in capital projects at Soda
Springs for exploration and new mine development, heavy equipment, furnace
upgrades, process improvement, environmental compliance and cost improvement
Lawrence, DI - Page 7
1 projects. Our capital plan for 2011 through 2015 requests corporate funding of an
2 additional $75 millon for the Soda Springs plant. In large part, these expenditures
3 are driven by strict environmental regulations. Our Chinese competition isn't
4 exposed to these same pressures.
5 Q
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7 A
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is PRICE CERTAINTY AN STABILITY IMORTAN TO
MONSANO'S DECISION-MAKIG PROCESS.
Price certainty and stability are very important to Monsanto. Monsanto is not a
monopoly nor does it have the opportnity to earn a guaranteed rate of return on
9 its investments. The Soda Springs plant is a capital-intensive facility.
10 Phosphorus production requires long-term planning and milions of dollars of
11 capital investment. Also, because most of our work force needs to be highly
12 skiled, it takes years of training and development to maximize the value of our
13 people.
14 New investments are needed to develop ore deposits for the future and
15 install the next generation of environmental equipment to ensure compliance with
16 ever more strngent environmental regulations, a cost our Chinese competitors do
17 not have. To justify these investments, Monsanto must be able to have reasonable
18 assurance that Soda Springs can remain in a competitive cost position.
19 Unfortnately, price certainty and stability has not existed in recent years as
20 a result of regular and substantial rate increases from PacifiCorp, as described in
21 the testimony of Kathry E. Iverson.
Lawrence, DI - Page 8
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is MONSANO CONCERND ABOUT PACIFICORP'S PLANS TO
MA MASSIV MUTI-BILLION DOLLAR INVSTMNTS IN
RENEWABLE RESOURCES AN TRASMISSION?
Most certainly. We are not convinced that these investments wil deliver any value
to the people of the State of Idaho nor do we believe that they are needed. We fully
support the rate making principle of cost causation. Those who cause a particular
cost to be incurred should be the ones that pay for it. However, the current revised
protocol allocation methodology continues to allocate costs to Idaho that were not
caused by Idaho customers. We suggest that the Commission take special
consideration prior to approving any piece of a multi-bilion investment which has
a 40-50 year lifespan, and undertake a significant review of revised protocol in the
upcoming case to make sure Idaho customers are not paying for cost increases
driven by policies and growth in other jurisdictions. In recently fied allocation
case, PAC-E-IO-09, we urge the Commission to scrutinize which states are driving
the need for the Energy Gateway transmission project and new resource
investments, carefully evaluate the resulting rate impacts for Idaho consumers now
and into the future and determine if Idaho should pay for these costs.
CAN MONSANTO PASS ON SIGNIFICAN INCREASED COSTS AS
PROPOSED IN TIDS CASE?
No, we can't. The Chinese competition is setting the global price of glyphosate and
we do not expect the price to increase for the foreseeable future. In addition,
herbicide customers have made it abundantly clear that they wil purchase the least
Lawrence, DI - Page 9
1 cost product available in the marketplace. We can't pass on any new costs that
2 aren't also a burden for our competition.
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is MONSANTO CONSIDERIG SHUTING DOWN THE SODA
SPRIGS PLAN AS A RESULT OF THE PRICE INCREASES
PROPOSED BY ROCKY MOUNAI POWER IN TmS CASE?
No, we aren't at the current time. We are fully committed to meeting the needs of
our customers. We also currently believe that the Soda Springs plant is a key link
in our supply chain. However, this fiing (and the additional fiings expected over
the next few years) seriously threaten our ability to meet our customers' needs
and maintain the long-term viability of the Soda Springs plant. We are dedicated
to continue to work with the utilty and the Idaho Commission to develop a long-
term solution which wil allow us to successfully compete in our marketplace over
the long term. We believe the proposal that Ms. Iverson is recommending in her
testimony wil help accomplish this objective.
DOES TIDS CONCLUDE YOUR TESTIMONY?
Yes.
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