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Home My WebLink About20041105Answer - Cross Petition of Potlatch.pdfORIGINAL Conley E. Ward (ISB No. 1683) GIVENS PURSLEY LLP 601 W. Bannock Street O. Box 2720 Boise, ID 83701-2720 Telephone No. (208) 388-1219 Fax No. (208) 388-1300 cew~givenspursley .com , ,... n '-' \ \t .- fI t!J ,-. '~j L i\' - U " It..ED lnuti t~O\f - 5 Pi; 4: 03 , ,::::"'!; j , I':C: !I"II"110S\OH ' " . 't .... "-. 1 L. ' ..- Attorneys for Potlatch Corporation S:\CLIENTS\1314\54\Potiatch Cross-Petition for Reconsideration.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- POTLATCH CORPORATION' ANSWER AND CROSS- PETITION FOR RECONSIDERATION Potlatch Corporation ("Potlatch"), pursuant to Rule 331.02 of the Commission s Rules of Practice and Procedure, respectfully cross-petitions this Commission for reconsideration of Order No. 29602 previously entered in the above-entitled case. Specifically, Potlatch requests reconsideration of that portion of Order No. 29602 that disallows only one-third of the losses associated with Avista s natural gas transaction identified in the record as "Deal A." Potlatch respectfully submits that, as both a matter of law and a matter of equity, the entirety of the Deal A costs must be disallowed for ratemaking purposes. CROSS-PETITION Perhaps the most fundamental principle of regulatory law is the maxim that a regulated utility s rates and charges ". . . shall be just and reasonable. Every unjust or unreasonable charge POTLA TCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 1 made, demanded or received for such product or commodity or service is hereby prohibited and declared unlawful." Idaho Code ~ 61-301. This "just and reasonable" rate standard necessarily assumes reasonable managerial competence and prudence. If a utility company spends money unnecessarily or imprudently, such expenditures cannot be passed on to ratepayers. Acker United States 298 U.S. 426 (1936) (rejecting certain marketing costs incurred for stockyards on the grounds that they were extravagant and wasteful); Smith v. Illinois Bell Tel. Co.282 U. 133 (1930) (finding that telephone company s annual depreciation charge was excessive). In Acker the United States Supreme Court explained the role a commission plays in protecting ratepayers from unnecessary and imprudent expenses: The contention is that the amount to be expended for these purposes is purely a question of managerial judgment. But, this overlooks the consideration that the charge is for a public service, and regulation cannot be frustrated by a requirement that the rate be made to compensate extravagant or unnecessary costs for these or any other purposes. Id. at 430-31. The Idaho Supreme Court has likewise repeatedly held that a regulated entity has the right to collect a return only on "necessary and prudent investments.Utah Power Light Co. v. IPUC 105 Idaho 822, 826 673 P.2d 422 426 (1983) Utah Power Light If'(citing Citizens Uti!. Co. v. IPUC 99 Idaho 164, 171 , 579 P.2d 110, 117 (1978)); see also Boise Water Corporation v. IPUC 97 Idaho 832, 836, 555 P.2d 163 (1976) and Washington Water Power Co. v. Kootenai, etc.99 Idaho 875 , 880, 591. P.2d 122 (1979) (dicta). The overwhelming weight of the evidence of record is that the Deal A natural gas hedge was reckless and imprudent in the extreme. A vista s defense of Deal A amounts to nothing more than the assertion that it "provided the necessary gas supply, at a fixed cost, to fuel a needed generation plant." A vista Corporation s Petition for Reconsideration at 5 (emphasis original). The short answer to this assertion is that it is never appropriate for a utility to take a price POTLA TCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 2 position under the circumstances A vista was facing when it entered into Deal A. As this Commission has stated in another case , " it is inappropriate to lock in high prices solely for the sake of stability.In the Matter of the Application of Intermountain Gas Company for Authority to Increase its Purchased Gas Cost Adjustment (OGA) Rate Order No. 29540, p. 4. Furthermore, A vista s justification for Deal A has all the earmarks of an ex post facto invention. As the Commission noted in its Order The paper trail that the Commission and our auditing Staff rely on for gas benchmark transactions was not present for Deal A and B. The appearance at hearing was that the justification for the transactions was cobbled together after the fact. Other than a notational entry that the financial hedges were required by lenders to obtain construction financing (financing that was ultimately not secured) there was no lender documentation to support such a requirement. Order No. 29602 at 45. But even more damning is the fact that, as Dr. Peseau s testimony points out, Deal A did not in fact lock in a physical purchase of gas as A vista s Petition alleges. The physical purchase had already been made. What Deal A did lock in was an immediate gamble on the price direction of the natural gas futures market; and that gamble led to immediate losses long before physical purchases were actually made. Peseau Direct Testimony at 19 24-25. The length of the deal and the financial exposure it created were unprecedented for Avista. Peseau Direct Testimony 27. Furthermore, Deal A was unprecedented in the industry as a whole. Dr. Peseau examined the FERC database of 37,4 72 natural gas hedges entered into in May of 2001 and found none with even half the duration of Deal A's 36 months. Peseau Direct Testimony at 25. Incredibly, this risk was assumed without any formal cost benefit analysis of the sort that is normally a matter of course when a utility undertakes a major expenditure or risk. See e. g., 1 It is worth noting that Avista s Petition for Reconsideration does not offer to produce any additional documentation to rebut this Commission rIDding. POTLA TCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 3 Industrial Customers of Idaho Power v. IPUC 134 Idaho 285 , 292-293 1 P.3d 786, 793-794 (2000) (demand side management ("DSM") expenditures were prudent based on evidence showing the utility had pre-evaluated the cost-effectiveness of the DSM programs). Avista Petition for Reconsideration merely repeats its earlier arguments that its analysis demonstrated that the "fixed" gas price would produce electricity at prices below the then existing electric market projections. Avista Petition at 6-8. This analysis would perhaps have some relevance if Avista had been considering a fixed price, long-term purchase of natural gas for contemporaneous electric generation. But this analysis was totally inadequate when considering a separate hedge of natural gas prices because the use of this derivative introduced a new and unique element of risk with the natural gas hedge Avista would incur immediate profits or losses, depending on which way the market moved, long before payment for physical gas deliveries would otherwise have been required. Taking on this "derivative" risk without evaluating it as an exposure separate and distinct from the physical purchase of gas was not only imprudent, it was specifically prohibited by Avista s risk management policies, as Dr. Peseau s quotation from the company s Risk Policy makes abundantly clear: Any incremental market exposure created from the use of derivatives is inconsistent with the risk management objectives of this Policy and is not permitted. The use of derivatives exposes A vista Corp. to risks similar to risks of physical products, and may have additional liquidity, settlement. legal. and systematic risk attributes Even the proposed use of derivatives that would hedge risks should be assessed against these additional risks, and such use is permitted only to the extent that the expected benefit is considered to outweigh these risks. Peseau Rebuttal Testimony at 5 (emphasis added). Deal A imposed exactly the type of additional liquidity, settlement, legal, and systematic risk(s)" described in the Risk Policy because it impacted A vista s liquidity by requiring immediate settlements rather than paying for POTLATCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 4 gas as delivered, and it introduced the additional legal risk associated with a potential default of the party to the hedges. Neither Avista s evidence at hearing nor its Petition for Reconsideration makes even a colorable claim that these risks were assessed separately as required by the company s Risk Policy. Under these circumstances, the Commission s disallowance of one third of Deal A' costs is a wholly inadequate remedy. Deal A was imprudent and "not permitted" under the Company s Risk Policy, and it should similarly be "not permitted" for ratemaking purposes. The Commission can have no basis for finding that any portion of the costs associated with Deals A can be passed on to ratepayers as necessary and prudent expenditures. That being the case recovery of any portion of these costs is an unjust and unreasonable charge that is precluded as a matter of law. The Commission simply doesn t have authority to attempt a middle approach that attempts to give something to both the utility shareholders and its ratepayers. The Deal A losses must be left with the utility whose incompetence and recklessness caused their incurrence. They cannot be foisted, in whole or in part, on innocent ratepayers who had no role in Avista unilateral error in judgment. ANSWER Potlatch supports the Commission s disallowance of a portion of the Boulder Park costs. The simple fact is that Boulder Park's costs were wildly excessive when compared to any reasonable cost overrun possibilities. Clearly if Boulder Park had been purchased from an independent third party contractor, it would have been unreasonable for Avista not to cap any potential cost overruns by contract. It is not unreasonable for the Commission to impose a similar overrun limitation on plants built by A vista. POTLATCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 5 CONCLUSION Potlatch respectfully requests that the Commission confirm its original disallowance of a portion of the Boulder Park costs and modify its original order to disallow the entirety of Deal s costs for ratemaking purposes. Potlatch does not intend to submit new evidence on these issues, nor does it request further proceedings. RESPECTFULL Y SUBMITTED this 5th day of November 2004. otlatch Corporation POTLATCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 6 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this 5th day of November 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 ) U.S. Mail ~) Hand Delivered J Overnight Mail J Facsimile Scott Woodbury Lisa Nordstrom Idaho Public Utilities Commission 472 W. Washington Street O. Box 83720 Boise, ID 83720-0074 swoodbu~puc.state.id. us lnordst~puc.state.id. us ) U.S. Mail (J1 Hand Delivered J Overnight Mail ) Facsimile J E-Mail David J. Meyer Senior Vice President and General Counsel A vista Corporation O. Box 3727 1411 E. Mission Ave., MSC- Spokane, WA 99220-3727 david.meyer~avistacorp. com I) S. Mail J Hand Delivered ) Overnight Mail J Facsimile (vi) E-Mail Kelly Norwood Vice President, State and Federal Regulation A vista Utilities O. Box 3727 1411 E. Mission Ave., MSC- Spokane, W A 99220-3727 kelly .norwood~avistacorp.com (./) U.S. Mail J Hand Delivered J Overnight Mail J Facsimile ( ./J E-Mail Dennis E. Peseau, Ph. Utility Resources, Inc. 1500 Liberty Street SE, Ste. 250 Salem, OR 97302 dpeseau~exci te. com (ijU.S. Mail ) Hand Delivered ) Overnight Mail ) Facsimile ( JJ E-Mail POTLA TCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 7 Charles L.A. Cox EV ANS , KEANE 111 Main Street O. Box 659 Kellogg, ID 83837 ccox~usamedia. tv ( Jj U.S. Mail J Hand Delivered J Overnight Mail J Facsimile ( '/J E-Mail Michael Karp 147 Appaloosa Lane Bellingham, W A 98229 michael~awish.net (Jj U.S. Mail ) Hand Delivered J Overnight Mail J Facsimile (J) E-Mail (./J U.S. Mail ) Hand Delivered J Overnight Mail J Facsimile ( J'j E-Mail Brad M. Purdy Attorney at Law 2019 N. ih Street Boise, ID 83702 bmpurdy~hotmail. com Anthony J. Yankel 29814 Lake Road Bay Village, OH 44140 (v1 U.S. Mail ) Hand Delivered J Overnight Mail ) Facsimile ( I) E-Mail t1urii6 MafJ fw Conley E. Ward POTLA TCH CORPORATION'S ANSWER AND CROSS-PETITION FOR RECONSIDERATION - Page 8