20101222Smith Di.pdf

F::.ECF:I
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSI~~OnEC 22 AÎ'1 ll: 01
IN THE MATTER OF THE APPLICATION )
OF ROCKY MOUNTAIN POWER FOR )
APPROVAL OF CHANGES TO ITS )
ELECTRIC SERVICE SCHEDULES AND A )
PRICE INCREASE OF $27.7 MILLION, OR )
APPROXIMATELY 13.7 PERCENT )
)
CASE NO. PAC-E-I0-07
DIRECT TESTIMONY OF
JAMES R. SMITH
(Economic Valuation of Monsanto Interruptible Products)
ON BEHALF OF
MONSANTO COMPANY
December 22, 2010
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Please state your name, employer and business address.
My name is James R. Smith. I am employed by Monsanto Company at the Soda
Springs Plant and my business address is P.O. Box 816, Soda Springs, Idaho 83276.
Are you the same James R. Smith who previously med testimony in this
proceeding?
Yes, I am. On November 1, 2010 I provided testimony as to the operation of
Monsanto's Soda Springs Plant, along with information on the current 2008 Electric
Service Agreement, loss of market share, and economic and other impacts concernng
the Soda Springs Plant.
What is the purpose of your testimony?
The purose of ths testimony is to present additional facts relevant to the second
phase that wil establish a rate for Monsanto's interrptible power in accordance with
the Commission's Order No. 32098 entered October 22,2010.
Have Monsanto's rates increased in recent years?
Yes. In 2006 Monsanto's rates increased 16.5% pursuant to Stipulation approved by
the Commission in Order No. 30197, Case No. PAC-E-06-09. Pursuant to Stipulation
approved by the Commission in Order No. 30482, Case No. PAC-E-07-05,
Monsanto's rates increased another 21.5% over thee years, consisting of 13.5% in
2008, another 3% in 2009 and another 5% in 2010.
Smith, Di - 1
Monsanto Company
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Were the Company's valuation methodologies presented in these cases agreed to
by Monsanto or established by the Commission?
No. The valuation methodologies presented by the Company were not agreed to by
Monsanto nor adopted by the Commission in either of these cases. In fact, in Order
No. 30482 the Commission specifically acknowledges on p. 8 that: "the curtailment
valuation for Monsanto is based on a "black box" deterination with no pary
accepting a specific methodology for setting this valuation.
For how long has Monsanto purchased interruptible power from PacifCorp and
its predecessors?
Monsanto has been served as an interptible customer for nearly 60 years from
PacifiCorp and its predecessors. While the terms of the varous contracts providing
interrptible power have vared over the years, all have provided the Company the
right to interpt Monsanto's load. Monsanto's long-term plans are to continue to take
serice as an interrptible customer for our entire load, except for the 9 MW of firm
power.
Over the last three years have the number of hours of curtailment also increased?
Yes. The hours of economic curtailments increased from 800 in 2008 to 830 in 2009,
and to 850 in 2010. When the operating reseres and system integrty hours are added
in, the total interptible hour for 2010 were 1,050.
Smith, Di - 2
Monsanto Company
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Does Monsanto propose to change the number of hours or other terms and
conditions regarding Monsanto's load?
No. Monsanto proposes no change to the hours or other curtailment option terms.
Nor has the Company proposed any changes. I am unaware of any problems with the
current operation of the curtailment provisions contained in the contract. However,
Monsanto would be wiling to consider any changes that would provide greater
benefits to the Company or reduce Monsanto's rates, provided that Monsanto's current
production is not diminished.
Mr. Walje's rebuttal testimony on page 12, lies 9-13, states: "If Monsanto was
truly a non-firm customer as they claim and would lie you to believe, Rocky
Mountain Power's dispatch office would be callg Monsanto each day to let
them know which hours of that day they could run their furnaces, because we
need the electric capacity for customers who do pay for firm servce, which is
obviously not the case." Do you agree with that statement?
Absolutely not. Mr. Walje's testimony displays a total lack of understanding how the
Company actually curtails Monsanto's serice, and it is apparent he has never
examined either the Company's or Monsanto's curtailment logs. In fact, the
Company's dispatch offce calls Monsanto throughout the year stating exactly when,
what type, how large and how long they want to interpt serce to Monsanto.
Monsanto immediately responds to ever request and have at all times fully complied
with the contract terms. Accordingly, the Company does in fact directly control when
Monsanto's fuaces run.
Smith, Di - 3
Monsanto Company
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Are Monsanto's furnaces available to interrupt throughout the entire calendar
year?
Yes, they are. Our records and theirs reflect interptions in most months of the year
although they are mostly concentrated durng the sumer peak months.
Do you maintain logs of the curtailment requests received from PacifCorp?
Yes. Exhibit 252 is a copy of our operators' logs reflecting the curtailments in 2007
through 2010 by type, date, lengt and amount. These logs also reflect that Monsanto
typically curails in a matter of seconds from when the request is received.
Where are the curtailment options defined and what do they consist of?
Anual curailments for system integrty, for operating reseres and for economic
reasons are set forth in Exhibits A and B to the 2008 Agreement, Exhibit 252. For
operating reserves the Company can curtail 95 MW for 188 hours. For system
integrty the Company can interpt up to 162 MW for 12 hour. For economic
curailment they can take up to 67 MW for up to 850 hours.
Does Monsanto have any right to direct the interruptions?
No.
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Monsanto Company
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Does Monsanto ever curtail all three furnaces at the same time?
Yes, as I explained earlier 162 MW can be taken for system integrty. The most recent
System Integrty event was just this past September 15, 2010 when PacifiCorp
dispatchers requested that all thee furnaces be interpted.
Furtherore, economic curtailments and interrptions for operating reserves
can be taken simultaneously resulting in a reduction of 162 MW. For example, on
July 18, 2010, fuace #9 (67 MW) was called for economic curailment from 8:30
AM to 11 :30 PM (Mountain Time). At 4:58 PM that same day, PacifiCorp requested
an operating reserve interption which meant that we shut down furnaces #7 and #8
(95 MW). As another example, on July 20,2010, our furnace #9 was called for
economic curtailment from 9:30 AM to 11 :30 PM, and two different operating resere
interrptions occured at 5:16 PM and 8:13 PM, again shutting down fuaces #7 and
#8. So even durng an economic curtailment, operating reseres have priority and
PacifiCorp can call upon the 95 MW.
Has PacifCorp ever taken more than they are entitled to under the 2008
Agreement?
Yes. The most recent time was in 2008 when PacifiCorp requested more system
integrty hours to deal with emergency situations and we provided it to them. Soda
Springs Plant operators are told to comply with ever request from PacifiCorp
dispatch personneL. I, along with counterpars from Rocky Mountain Power, review
voice tapes and records to deterine if the curailment followed the 2008 Agreement,
and decide how to categorize the event.
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Monsanto Company
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Has PacifCorp demonstrated through its own actions the importance of
Monsanto interruptibilty?
Most certainly. PacifiCorp's own Integrated Resource Plans clearly demonstrate they
value and count on Monsanto interptibility as a resource for planing purposes at
least though 2019. The increase in the total hours of interption and flexibilty in
recent contracts surely demonstrates importance to the Company. The fact that the
Company actually takes interptions in most months and uses most if not all of the
total available hours of interptions each year further evidences importance to the
Company.
On page 12, lies 17-18, Mr. Walje states: "The Company has been workig for
over two decades to bring Monsanto to full cost of servce." Do you agree with
this statement?
Absolutely not. It is unmaginable that Mr. Walje could reach this conclusion and his
testimony indicates that either he has never reviewed or simply chose to ignore the
Company's fiings and the Commission's Order, at least back to 1990.
Have you reviewed various applications and other papers med by the Company
with the Commission as well as the various Orders of the Commission dealig
with Monsanto's cost of service from 1990 forward in order to rebut this
allegation by the Company that Monsanto has been under cost-of-service for over
two decades?
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Monsanto Company
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Yes, I have.
Based on your review of the Company's mings and the Commission's Orders,
what do you conclude?
Up until recently cost of serice studies were not utilized for the purpose of setting
Monsanto's rates. It was recognized by Monsanto and the Company that Monsanto
was served out of operating reserves with no plants built or needed to meet its
interptible demand and service. Instead, Monsanto was priced based upon covering
the varable costs, transmission costs and making a reasonable contrbution to fixed
costs. Only in recent years has cost-of-serice methodology been looked to in
establishing Monsanto's rates.
In Docket No. PAC-E-01-16, where the Commission entered Final Order No.
29157 dated Januar 27,2003, the Commission set a rate for Monsanto that was
deemed fair, just and reasonable, but did not adopt any specific cost-of-serce study.
Since that time Monsanto's rates have continued to increase but all of those occured
by reason of settlement stipulations approved by the Commission, and in paricular no
methodology was agreed upon for the valuation of Monsanto's interrptibility. In
approving the varous stipulations in prior years, the Commission found the rates to be
fair, just and reasonable.
Please describe in greater detail the various Company mings and Commission
Orders that you believe support and establish the conclusions you discuss above
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Monsanto Company
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and undermie the credibilty of Mr. Walje's testimony that Monsanto has been
under cost-of-service for more than twenty years.
I discuss each item in chronological order in Attachment A to my testimony.
Mr. Clements' Supplemental Testimony at page 6 seemed to suggest that
Monsanto has had some type of preference for shorter term contracts with
PacifCorp. Is that an accurate characterization?
No. Price certainty and stability has always been highly important to Monsanto
because of the large capital expenditues and long-term planing requirements for
permitting, developing and operating our phosphate ore mines. The Commission has
recognzed the importance of price certainty and stability to Monsanto in Order No.
30482, stating at page 12:
"Affordable electrcity at a price that is relatively stable and reliable is
important to Monsanto."
It is PacifiCorp, not Monsanto, that has sought shorter-term contracts,
paricularly in recent years when the contracts have been for thee years or less. Of
greatest concer to Monsanto is the fact that since our contracts are now tied to tarff
rate changes, PacifiCorp controls when rate changes occur and the associated pricing.
Furthermore, the Company's fiing in this case suggests a continuing pattern of multi-
bilion dollar capital investments over the next several years, indicating the Company
wil be making frequent, if not anual, general rate case filings in order to place these
expenditures into rate base and earn a rate of return. Mr. Clements is mistaken in that
MonSanto does not desire a longer term agreement with the Company.
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Monsanto Company
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Are you aware of longer term contracts PacifiCorp has entered into with other
interruptible customers?
Yes. In 2006, PacifiCorp signed a seven (7) year agreement with an interrptible
customer lasting until December 31,2013, and in 2009 signed a five (5) year
agreement with another interrptible customer through December 31, 2014. Monsanto
has not had a contract greater than three years since the 1995 contract terminated at the
end of2003.
In addition, these other interptible contracts include provisions for handling
rate changes over the contract ter that are not based on contentious cost of serce
issues and suspect valuation methodologies. For example, both the rates and
interptible valuation of the 5-year contract are adjusted each year by the same
percentage change, if any, as Utah rates in general change. This contract also includes
"highest" and "lowest" index adjustments that provide a "ceiling" and "floor" to price
changes. Those types of mechanisms would help Monsanto to have a longer term
contract while keeping their rate impact in line with the overall system increase for
Idaho.
While our rate may change frequently since it is now tied to tarff changes,
there is no reason the other contract terms should not remain in place long-term. Ths
would dispel any doubt that Monsanto's load wil remain interrptible and used as a
demand side resource to the Company for years to come.
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Monsanto Company
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Do you C"md other troubling inconsistencies with Mr. Clements' Supplemental
Testimony?
Yes. On page 4, lines 11-15, Mr. Clements suggests that the Company follows a
"customer indifference" approach and seeks to pay industral customers for
interrptible products the same price the Company would pay to acquire those same
products from other sources, "such as the market or its own resources." Ths seems to
suggest that the Company would treat the demand side resource such as Monsanto
equally to constrcting its own peaker plant or acquiring a new windmil. Despite
paying lip serice to ths purorted "customer indifference" approach, Mr. Clements
seems to ignore what it costs the Company to acquire its own new resources,
advocating on page 19 for a type of energy market price resulting from the Front
Office and GRID models, while discarding the peaker resource approach. It seems
rather obvious that the Company's honest preference is to build and own its own
resources in order to benefit from the opportnity to ear a favorably high rate of
retu on common equity.
Mr. Clements has also assered that absent a Commission decision or
stipulation between the two paries by December 31, 2010, Monsanto wil receive a
bil beginning Januar 1, 2011 at 100% firm rates. The Commission has ruled in its
Order No. 32098 that Monsanto's interrptible credit wil continue at its present level
"until the matter is decided by the Commission" and that "all other service ters in the
2008 Agreement shall remain unchanged." (p. 5)
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Monsanto Company
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Do you have any further comments to make on the Company's valuation of
Monsanto's interruptibilty?
Yes. Monsanto has always been wiling to work with the Company in strctung the
curtailment hours and terms of Monsanto's interrptibility in a maner that maximizes
the benefit to the Company and enhances value to Monsanto. It is ver disappointing
and frstrating for Monsanto to lear in this case that PacifiCorp now seeks approval
to de-value Monsanto's interptibility by over 60%. At the same time the Company
is trng to diminish the value of Monsanto as a demand response resource, it
continues to build new wind generation, gas peaker plants and other resources at
increasingly higher prices and demanding full recover of both capital and operating
costs. Surely if the Company honestly is "customer indifferent" it should have no
problem valuing Monsanto curailment the same as its own resources. To do
otherwise is simply disingenuous.
Does this conclude your testimony?
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Smith, Di - 1 1
Monsanto Company
Attachment A
1 Chronology of Cases
2 1. Case No. UPL-E-90-1
3 In Case No. UPL-E-90-1, David L. Taylor fied testimony dated April 30, 1990, where
4 he stated on page 1: "I am also responsible for the development of preparation of the
5 Company's cost-of-service studies." On page 15 to Mr. Taylor's testimony in response to a
6 question regarding how special contract customers have been treated in the cost-of-serice
7 study, he provided the following answer beginning at line 18: "The non-firm portion of
8 special contract loads including those in UP&L's other jursdictions are not allocated any cost
9 directly in the embedded cost-of-service study." Mr. Taylor's testimony makes it clear that
10 Monsanto could not have been under cost-of-service at that time because it was not even
11 included in their cost-of-serice studies.
12 2. Case No. UPL-E-92-2
13 Next is Order No. 24220 issued by the Commission in Case No. UP&L-E-92-2. Ths
14 case was fied by Utah Power & Light Company for approval of a Power Supply Aweement
15 entered into July 3, 1991, with Monsanto. The Order states at page 2: "According to the
16 Application, demand charges are not assigned to Monsanto's interrptible serce because the
17 Company provides that serice to Monsanto out of its operating reseres (i.e., generation
18 plant is not built to meet an interptible demand)." The Application states that the prices for
19 interrptible serice under the proposed Agreement are expected to cover the Company's
20 varable energy costs, transmission costs, and make a contrbution to fixed costs over the
21 terms of the contract. . .". The findings ofthe Commission in Order No. 24220 are set forth
22 in page 5 as follows:
23 The rates for interrptible servce, set forth in the Agreement, wil cover
24 UP&L's variable energy costs, transmission costs and make a contrbution to
25 fixed costs over the ter of the contract. Furerore, the Company's most
26 . recent cost-of-serice study revealed that Monsanto's firm rates provided a rate
27 of retu at or above the jurisdictional rate of retu for UP&L's Idaho
28 customers. Based on the foregoing, we hereby find that the rate for both
29 interrptible and firm service set forth in the Power Supply Agreement are fair,
30 just and reasonable. (emphasis added)
Smith, Di - 1
Monsanto Company
Attachment A
1 Quite obviously, at the time of this 1992 Order, Monsanto was paying rates that were above
2 what was reflected in the Company's cost-of-service study, not below as claimed by Mr.
3 Walje.
4 3. Case No. UPL-E-95-4
5 The next case was in 1995 when the Company filed Case No. UPL-E-95-4, an
6 Application seeking approval of a Power Supply Agreement with Monsanto dated November
7 1, 1995. The Application included an attached Technical Assessment Package. Under
8 Section 8 dealing with "Revenue and Cost Comparsons", pages 5-7, the Company made the
9 following statements:
10 "Since PacifiCorp has served Monsanto for over 40 years, no incremental
11 resources need to be acquired to continue servng the customer. The Company
12 presents this analysis as an upper bound for contrbution to fixed costs." (p. 5)
13 "These contrbutions sere to reduce the revenue requirements otherise borne
14 by the Company's other customers; thus, these customers wil enjoy an
15 economic benefit flowing from the new agreement." (p. 6)
16 "Other customers sered by PacifiCorp wil benefit from Monsanto's
17 continued contrbution to fixed costs."
18 The Commission approved the 1995 Contract and no indication was given in the Company's
19 filing or in the approval Order that Monsanto was paying anyting less than cost-of-service or
20 ,that the rates set were anything but fair, just and reasonable. As such there is cerainly no
21 basis for Mr. Walje to claim in 1995 that Monsanto was under cost-of-service.
22 4. Case No. PAC-E-06-09
23 In Case No. PAC-E-06-09 the Commission issued Order No. 30199 on December 18,
24 2006, approving a Settlement Agreement which provided for Monsanto's rates to increase
25 16.5 percent. The Commission found these rates to be fair, just and reasonable in approving
26 the Stipulation. Again, in this 2006 case Monsanto's established rates by Settlement
27 Stipulation again were found to be fair, just and reasonable, and there is no indication given in
28 the Stipulation or the Order to the contrar.
Smith, Di - 2
Monsanto Company
Attachment A
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5. Case No. PAC-E-07-05
In Case No. PAC-E-07-05 the Commission entered Order No. 30482, again approving
a Stipulated Settlement Agreement which provided for Monsanto's rates to increase 13.5
percent in 2008,3 percent in 2009 and 5 percent in 2010, a total of21.5 percent, as contrasted
with a 6.2 percent overall average increase for all customers. Again, there was no agreement
concerning cost-of-serice and no acceptance of any methodology. In fact, page 8 of the
Order stated: "The curtailment for Monsanto is based on a "black box" determination with no
pary accepting any specific methodology for setting this valuation." The Commission stated
on page 12 of the Order: "The interptible products, we find, provide operational benefits to
PacifiCorp. We find the products to be priced at a level commensurate with the value they
represent today." (Emphasis added.)
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6. Docket No. PAC-E-08-07
Mr. Walje's testimony again asserts that there was some cost-of-service methodology
established in the most-recent 2009 rate case finding Monsanto's rates to be under cost-öf-
serice. This again is inaccurate. In Order No. 30783 entered April 16, 2008, a Settlement
Stipulation was approved providing for an increase of the rates to all other paries, but
excluding Monsanto and Agrum. Nowhere in Order 30783 was any cost-of-serice
established for Monsanto because Monsanto's rates had just increased in Case No. PAC-E-07-
05 (Order No. 30482) discussed above, and they were not subject to further adjustment prior
to Januar 1, 2011 as recognized by the Commission in Order No. 30783 at page 9.
Smith, Di - 3
Monsanto Company