20040709Peseau Rebuttal.pdf

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Conley E. Ward (ISB No. 1683)
GIVENS PURSLEY LLP
601 W. Bannock Street
O. Box 2720
Boise, ID 83701-2720
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Attorneys for Potlatch Corporation.
S:\CLIENTS\1314\54\Peseau Rebuttal Testimony.DOC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN
THE STATE OF IDAHO.
Case Nos. A VU-04-
A VU -04-
REBUTT AL TESTIMONY OF DENNIS E. PESEAU
ON BEHALF OF POTLATCH CORPORATION
June 21, 2004
ORIGINAL
ARE YOU THE SAME DENNIS PESEAU WHO PREVIOUSLY FILED DIRECT
TESTIMONY IN THIS CASE?
Yes.
WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY?
I have five areas of brief rebuttal:
Staff witness Hessing should not have accepted the Deal A excess gas costs
because his compelling arguments to disallow Deal B gas costs apply to Deal A as
well.
Staff witnesses overlooked the significant change in cost of service methods
proposed by Avista witness Knox.
Staff witnesses Schunke s and Hessing s proposal to move various rate schedules
only 20% of the way to cost of service will perpetuate the longstanding subsidies
between customer classes.
Coeur Silver Valley witness Yankel's proposal to directly assign primary costs to
Schedule 25 class has merit.
Staff s proposal to change the method of computing PCA rates should be rej ected
or modified.
Deal A and Deal B Financial Transactions
WHA T ARE THE PRIMARY ISSUES YOU ADDRESS IN YOUR REBUTTAL
TESTIMONY OF MR. HESSING REGARDING DEAL A AND DEAL B?
In a nutshell, I agree wholeheartedly with Mr. Hessing s recommendation to exclude all
the excess financial costs of the so-called Deal B. In fact, his approach is quite similar to
and parallels, the rationale I provide for excluding Deal B in my direct testimony. There
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 2 of
Case Nos. A VU-O4-1 and A VU-O4-
is no need to elaborate on our similar approaches and our identical conclusions with
respect to Deal B , other than to point out that our statements of the amounts in dispute
differ, primarily because I used system numbers while Mr. Hessing s figures are for the
Idaho jurisdiction and test year only.
My issue with Mr. Hessing s testimony is that the very compelling circumstances and
facts that lead Mr. Hessing to appropriately deny A vista recovery of Deal B costs, with
one exception, should have also compelled him to recommend disallowance of Deal A
costs. My testimony recommends the disallowance of the costs of both Deal A and Deal
WHA T IS THE ONE EXCEPTION TO THE SIMILARITY OF CIRCUMSTANCES
SURROUNDING BOTH DEAL A AND DEAL B?
The one dissimilar circumstance is that Avista Energy was the counterparty to Deal B.
Deal A the apparent counterparties were Mirant and BP. Thus, the Deal A counterparties
that profited so greatly were not part of Avista Corporation s corporate structure. But in
all other respects both Mr. Hessing s and my observations and criticisms regarding the
impropriety and imprudence of Deal A and Deal B are the same for both deals.
IS THE FACT THAT A VISTA CORPORATION ITSELF DID NOT PROFIT FROM
DEAL A SUFFICIENT TO JUSTIFY RECOVERY OF THE DEAL'S EXCESS GAS
COSTS IN THE PCA?
No. Mr. Hessing s other compelling arguments for denying recovery of Deal B costs on
the basis of imprudence also hold for Deal A. Both Mr. Hessing s direct testimony and
my own explain at length the numerous peculiarities and irregularities of both Deal A and
Deal B that lead to the conclusion that each of these deals was imprudent. In fact, the
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 3 of
Case Nos. A VU-O4-1 and A VU-O4-
extended period of 3 Yz years for the Deal A swap actually makes the bet the utility made
on Deal A prices far more speculative and imprudent than Deal B.
HOW DOES MR. HESSING EXPLAIN HIS PROPOSAL TO DISALLOW DEAL B
BUT ACCEPT DEAL A?
On pages 15-16 of his direct testimony, Mr. Hessing offers two reasons for not
disallowing Deal A. First, as explained above, the counterparties to Deal A were not
A vista affiliates. Second, Mr. Hessing opines that Deal A did not put A vista over "the
long limit contained in its Risk Policy.
YOU HAVE ALREADY EXPLAINED YOUR POSITION ON DEAL A
COUNTERP ARTIES NOT BEING A VISTA AFFILIATES. WHAT IS YOUR
RESPONSE TO MR. HESSING ALLOWING DEAL A BECAUSE IT WAS STILL
UNDER THE "LONG LIMIT?"
As I discussed in more detail in my direct testimony, Deal A and Deal B were both
financial trades, not physical transactions. In other words , Deal A and Deal B did not
purchase any natural gas. On page 5 , lines 14-24 of his testimony, Mr. Hessing describes
both the physical index-priced gas purchases and the subsequent financial transactions as
if they were all parts of Deal A and Deal B. But the proposed Deal A and Deal B cost
adjustments are strictly related only to the financial imprudence of these transactions, and
not in any way to the procurement of the physical natural gas. Therefore, I find it
irrelevant that the physical purchases were, or were not, over some designated volumetric
or long limit. Neither of the Deal A and Deal B financial trades was prudent on behalf of
the utility s customers for reasons explained in Mr. Hessing s and my testimony. I urge
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 4 of
Case Nos. A VU-O4-1 and A VU-O4-
PAGE IS CONFIDENTIAL
other reckless and unprecedented features of both deals that Mr. Hessing and I identify in
our direct testimony, compels the conclusion that both should be excluded from rates on
the grounds that their costs were imprudently incurred.
Staff Fails to Acknowledge the Importance of Avista s Incorrect 4-Factor Allocator
WHAT IS YOUR RESPONSE TO STAFF'S ADOPTION OF A VISTA'S COST OF
SERVICE METHODOLOGY?
Both Mr. Hessing and I testify that Avista s cost of service methodology generally
follows that ordered in prior Commission orders. However, I point out that there is a
significant change in Avista s newly proposed "factor" allocator for common costs.
While I indicate that a 4-factor allocator is not objectionable on its face, the manner in
which A vista witness Knox constructs this allocator is incorrect and unacceptable.
My issue here is with Mr. Hessing s characterization of A vista s study as consistent
with that used in its last general rate case "with minor modifications" (Hessing, page 4.
lines 1-2). What I want to make clear, and demonstrate quantitatively, is that his
characterization of "minor modifications" holds only if the newly proposed 4-factor
method of allocating common (overhead) costs is corrected as I propose on pages 33-
of my direct testimony. As I show below, the corrected 4-factor allocator I developed
represents a less extreme departure from the previously adopted allocator. In the case
Potlatch's Lewiston Facility, the prior method and my corrected 4-factor allocator should
and in fact do, produce similar cost allocations, both of which differ significantly from
the A vista results.
REBUTT AL TESTIMONY OF DENNIS E. PESEAU - Page 6 of 16
Case Nos. A VU-O4-1 and A VU-O4-
HOW DO YOU PROPOSE TO DEMONSTRATE THAT THE INCORRECT
ALLOCATOR PROPOSED BY A VISTA IS NOT, AS MR. HESSING STATES , A
MINOR MODIFICATION"
Below I list three columns summarizing the rate schedule rates of return from 1) the
40% energy/60% customer" used and adopted in prior proceedings, 2) Avista s newly
proposed but incorrect 4-factor allocator and 3) my corrected Avista s 4-actor allocator
Class
Schedule
General Service
Large General Service
Schedule 25
Potlatch Lewiston
Pumping
Lighting
AVERAGE
400 /600
Method
1. 04 %
35%
9.26%
07%
61%
79%
520/0
71 %
Avista
Factor
97%
70%
8.12%
1.1 7%
24%
24%
55%
71 %
Potlatch
Factor
84%
52%
8.16%
28%
60%
22%
15%
71 %
PLEASE EXPLAIN THIS TABLE.
My intent here is to show that Avista s incorrect 4-factor allocator is much more than a
minor modification." As I discussed in my direct testimony, Avista s results are skewed
by its inappropriate inclusion of variable fuel and purchase power expenses in the
definition of O&M. By including these energy costs in an allocator meant to allocate
fixed common costs, A vista improperly shifts costs to higher load factor customers.
While the percentage shift is relatively small, the effect in absolute terms is not. Avista
flawed cost of service change increases Potlatch Lewiston' s cost of service by
approximately 000 000 per year. A shift of this magnitude in common costs defies
common sense.
1 The Potlatch-calculated returns differ from those in my direct testimony because, in order to make accurate
comparisons, I do not here change the transmission allocator, as I recommend in my direct testimony.
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 7 of 16
Case Nos. A VU-O4-1 and A VU-O4-
Correcting A vista s mistaken inclusion of fuel and purchased power expenses, as I
show in the column headed "Potlatch 4-Factor " produces final allocations that are less
prejudicial to high load factor customers and more consistent with prior orders than
A vista s approach. My rebuttal Exhibit 213 summarizes the derivation of the Potlatch 4-
Factor method. The other columns are developed from A vista Exhibit 16, Schedules 2
and 3.
HOW DO YOU RECOMMEND THAT THE COMMISSION RESOLVE THESE
DISPARATE COST OF SERVICE RESULTS?
I recommend that the Commission either stick with its previously adopted "40%/60%"
method, or adopt the corrected 4- factor method that I propose.
Staff's Proposed 200/0 Movement to Cost of Service is Inadequate
WHAT IS THE ISSUE WITH RESPECT TO STAFF'S PROPOSAL TO MOVE EACH
RATE SCHEDULE 20% TOWARD COST OF SERVICE?
Both Staff witnesses Messrs. Hessing and Schunke proposed to limit the movement of
each customer class s rates to 200/0 of the discrepancy with cost of service, with the
remaining revenue requirement deficiency being made up by spreading the deficiency on
the basis of an equal percentage to each rate class.
My issue here is that the Staff proposal once again blunts any meaningful movement
to cost of service, thereby continuing indefinitely the longstanding inter-class rate
subsidies. The concurrent PCA reduction makes this an ideal time to finally make some
progress toward rate parity.
PLEASE EXPLAIN.
REBUTT AL TESTIMONY OF DENNIS E. PESEAU - Page 8 of 16
Case Nos. A VU-O4-1 and A VU-O4-
Staff justifies its proposal to make minimal progress toward cost of service on the basis
of avoiding rate shock. The unfortunate consequence of limiting rate increases of
customer classes currently being subsidized is that it generates a corresponding rate shock
to rate classes that are already paying well in excess of cost of service (Potlatch'
Lewiston Facility). For example, staff proposes an overall average rate increase of
15.8%. As my chart on page 7 of this testimony points out, the residential class s rates
currently generate roughly 20% to 400/0 of the average rate of return, no matter which
cost of service method is adopted. Yet staff proposes to limit the increase to the
residential class to 18.8%. On the other hand, Potlatch's current rates generate returns
well in excess of the system average return, yet Staffs proposal results in a 14.90/0 rate
increase for Potlatch. Stated another way, depending on the cost of service methodology
chosen, Potlatch is generating a rate of return that is approximately 3 to 5 times that of
the residential class, but the Staff proposes only a 3.9% difference in the percentage rate
increase assigned to the two classes. I respectfully submit this result is neither just nor
reasonable.
HOW DOES STAFF'S RECOMMENDATION IN THIS CASE SQUARE WITH ITS
RECOMMENDATIONS IN THE PAST?
As I understand it, in the previous A vista general rate increase Staff proposed three cost
of service options-to move rates one-third, one-half, or entirely to respective costs of
service. The Commission instead selected 200/0 as the overall cap on the movement to
cost of service.
DID THAT INITIATIVE IN FACT RESULT IN A PARTIAL CORRECTION OF
RELATIVE RATE OF RETURN DISPARITY?
REBUTT AL TESTIMONY OF DENNIS E. PESEAU - Page 9 of 16
Case Nos. A VU-O4-1 and A VU-O4-
Unfortunately, no. In fact the inter-class subsidy of the residential class has increased
rather than decreased, since the last A vista rate case. Under these circumstances, the rate
shock argument is wearing very thin. There has been no progress toward the elimination
of this subsidy for roughly five years, and I suspect Staffs proposal, if adopted, will be
revealed to produce little or no progress when the next A vista rate case rolls around. I
fully realize this is a tough issue for the Commission, but the indefinite continuation of a
subsidy of this magnitude is simply intolerable. It is bad economics and bad policy and
at best, it only postpones the day of reckoning when the residential class will ultimately
have to pay its full cost of service, or something very close to it. At that point, the rate
shock will be far worse than it would be in this case.
ARE THERE CIRCUMSTANCES IN THE PRESENT CASE THAT WOULD SOFTEN
THE RATE IMP ACT OF MOVING MORE BOLDLY TOWARD COST OF SERVICE?
Yes, the proposed PCA reduction provides an offset to any rate increase the Commission
ultimately approves. For example, if the Commission adopts the Staffs proposed 15.80/0
general rate increase , the net increase for the Idaho jurisdiction after the PCA adjustment
is only 2.4%. Under Staffs 20% proposal, the net increase in residential rates would be
only 5.% in this scenario. There is clearly room to make a more meaningful move than
this to equal class rates of return without causing rate shock.
WHA T DO YOU RECOMMEND THAT THE COMMISSION ADOPT IN TERMS OF
MOVEMENT TOWARD COST OF SERVICE?
I recommend that the Commission do two things. First, it should order that customer
class rates move 50% toward cost of service in this case. Second, the Commission
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 10 of
Case Nos. A VU-04-1 and A VU-04-
should express the intent that in subsequent cases, or within 2 years if no general rate
case is filed, rates will be moved an additional 500/0 toward cost of service.
Coeur Silver Valley s Direct Assignment of Primary Distribution Costs
I NOTICE YOU DID NOT DISCUSS SCHEDULE 25, THE OTHER CUSTOMER
CLASS THAT APPEARS TO BE HEA VIL Y SUBSIDIZED, IN THE PRECEEDING
SECTION OF YOUR TESTIMONY. WHY IS THAT?
After reading Mr. Anthony Yankel's direct testimony on behalf of Coeur Silver Valley, I
am convinced that all of the cost of service studies in this case, including my own
significantly overstate Schedule 25' s cost of service. Mr. Yankel points out that it is
possible and practical to directly identify all those A vista primary facilities necessary to
serve all Schedule 25 customers from the Company s accounting records. Since this is
possible, Mr. Yankel argues that it is always more accurate to directly assign those
facilities' costs to Schedule 25 customers , rather than average these customer-specific
costs into all other residential and smaller general service customers and then allocate
them on a less accurate basis.
WHAT IS YOUR POSITION WITH RESPECT TO THIS ISSUE?
While I have not fully reviewed Mr. Yankel's analysis, I can state that his position that
directly assigned costs are more accurate than those derived by a computed allocation is
correct.
The reason that directly assigned costs better reflect cost of service is rather
straightforward. If I can directly identify those investments made specifically to serve a
customer, I can clearly trace both the cause and the costs of those investments to that
customer. Mr. Yankel has identified the direct costs of primary distribution facilities
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 11 of16
Case Nos. A VU-04-1 and A VU-04-
used to serve Schedule 25 customers and, as I understand it, proposes to directly assign
these identifiable costs to the Schedule 25 class. I certainly agree in principle that this
direct assignment is preferable to an indirect cost allocation.
According to Mr. Yankel's calculations, this direct assignment of primary distribution
facilities significantly reduces the purported subsidy of Schedule 25 customers. I have
not attempted to verify his calculations. But as I have just noted, Mr. Yankel'
adjustment is correct in principle, and unless someone can demonstrate that it has been
improperly implemented or calculated, his ultimate conclusion-that Schedule 25's cost
of service is overstated-is correct as well.
Staff's Proposal to Change Basis for Computing PCA Rates
DOES STAFF PROPOSE TO CHANGE THE BASIS UPON WHICH PCA RATES
ARE COMPUTED?
Yes, on pages 22-24 of his testimony, Mr. Hessing proposes that the Commission change
from the current method of spreading PCA account balances to customer class rates on an
equal percentage" basis to a method of spreading balances on an equal cents per kwh
basis.
WHAT IS YOUR POSITION ON THIS ISSUE?
I oppose the proposal on both theoretical and practical grounds. First, I have always
argued that power supply costs are not 100% energy or kwh-based and should not
therefore, be spread on an energy-only basis. There is both a fixed or capacity
component and a seasonally-differentiated cost component to power supply costs that
makes spreading balances on a flat, equal kwh basis inaccurate. Recovering power
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 12 of16
Case Nos. A VU-04-1 and A VU-04-
supply adjustments on a per kwh basis is inconsistent with the way we establish base
rates, and should be rejected as a matter of principle.
WHAT IS YOUR PRACTICAL OBJECTION TO THE PROPOSAL?
In theory, whether PCA changes are recovered through percentage changes or energy rate
adjustments should be a matter of indifference to ratepayers. If base rates are properly
set, a customer who pays more under an energy only recovery of a surcharge will also
receive a proportionately larger benefit from any PCA "rebate." Over the long haul, each
customer s total PCA exposure should be the same under either recovery method.
But as a practical matter, high load factor customers such as Potlatch who compete in
national or global markets are not really indifferent. Switching to a per kwh recovery
method will make these customers' rates much more volatile , because the surcharges and
rebates will both be greater than under the current system. In short, their high rates will
be higher and their low rates lower under Mr. Hessing s proposal. This is a concern for
Potlatch and other industrial customers because it makes business planning and
management more difficult. Furthermore, rate increases can cause disruptions and losses
that cannot be recovered by corresponding decreases in subsequent years. To cite but one
example, a PCA rate increase can potentially shut an industrial customer off from some
markets or, in an extreme case, render production uneconomic in all markets. Losses like
these are not likely to be adequately compensated by benefits from PCA rebates in good
years.
ARE THERE ANY OTHER PRACTICAL PROBLEMS WITH STAFF'S PROPOSAL?
Yes. On page 23 , line7 to page 24, line 2, Mr. Hessing carefully explains that, due to the
fact that there are currently positive balances in the PCA accounts, and these accounts
REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 13 of 16
Case Nos. A VU-04-1 and A VU-04-
were collected on the present equal percentage basis, it would be very unfair to high load
factor customers to now change and attempt to recover these balances on a new, energy
only basis. He proposes that any change approved in the PCA methodology not be
implemented until the present deferral balances are cleared. I simply want to underscore
that this mixing of methods to accumulate and then to recover such balances is potentially
highly prejudicial to high load factor customers unless it is implemented when balances
are essentially zero.
DO YOU HAVE A SECOND RECOMMENDATION REGARDING THIS ISSUE?
Yes. If the Commission decides to make the change Mr. Hessing recommends in the
name of consistency, it should take the proposal to its logical conclusion. If the
Commission really believes that power supply adjustments are incurred on a "per kwh"
basis, the "cents per kwh" recovery should be "seasonalized" on a monthly or quarterly
basis in a manner similar to avoided cost rates. Doing so would allow PCA rates, like
other cost components, to track the actual changes in power costs as they vary over the
year. It is an easy matter to calculate the actual monthly kwh rate that cause the PCA
deferral balances to change, and from this information determine the basis for adjusting
the PCA rate seasonally. All the benefits of cost-causation and price signal
considerations that apply to base customer rates would then apply to PCA rates.
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes.
REBUTT AL TESTIMONY OF DENNIS E. PESEAU - Page 14 of
Case Nos. A VU-04-1 and A VU-04-
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 9th day of July 2004, I caused to be served a
true and correct copy of the foregoing document by the method indicated below, and
addressed to the following:
Jean Jewell
Idaho Public Utilities Commission
472 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
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Scott Woodbury
Lisa Nordstrom
Idaho Public Utilities Commission
472 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
swoodbu(illpuc.state.id. us
lnordst(illpuc. state.id. us
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David J. Meyer
Senior Vice President and General Counsel
A vista Corporation
O. Box 3727
1411 E. Mission Ave., MSC-
Spokane, W A 99220-3727
david.meyer(illavistacorp. com
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Kelly Norwood
Vice President, State and Federal Regulation
A vista Utilities
O. Box 3727
1411 E. Mission Ave., MSC- 7
Spokane, W A 99220-3727
kelly.norwood(illavistacorp.com
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Dennis E. Peseau, Ph.
Utility Resources, Inc.
1500 Liberty Street SE, Ste. 250
Salem, OR 97302
dpeseau(illexcite.com
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REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 15 of 16
Case Nos. A VU-04-1 and A VU-04-
Charles L.A. Cox
EVANS, KEANE
111 Main Street
O. Box 659
Kellogg, ID 83837
ccox(illusamedia. tv
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Brad M. Purdy
Attorney at Law
2019 N. ih Street
Boise, ID 83702
bmpurdy(illhotmail.com
Michael Karp
147 Appaloosa Lane
Bellingham, W A 98229
michael(illawish.net
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Anthony J. Yankel
29814 Lake Road
Bay Village, OH 44140
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REBUTTAL TESTIMONY OF DENNIS E. PESEAU - Page 16 of
Case Nos. A VU-04-1 and A VU-04-