COMMISSION WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) Docket No. UE-971422 Complainant, ) Volume 2 vs. ) Pages 17 - 290 THE WASHINGTON WATER POWER ) COMPANY, ) Respondent. ) ----------------------------- ) A hearing in the above matter was held on February 23, 1998 at 8:45 a.m. at 1300 South Evergreen Park Drive Southwest, Olympia, Washington, before Chairwoman ANNE LEVINSON, Commissioners RICHARD HEMSTAD, WILLIAM R. GILLIS and Administrative Law Judge MARJORIE R. SCHAER. The parties were present as follows: WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by ROBERT CEDARBAUM, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504. THE WASHINGTON WATER POWER COMPANY, by DAVID MEYER, Attorney at Law, 1200 Washington Trust Building, Spokane, Washington 97203. INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES, by MELINDA J. HORGAN, Attorney at Law, 1300 SW Fifth Street, Suite 2915, Portland, Oregon 97201. FOR THE PUBLIC, SIMON FFITCH, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. Cheryl Macdonald, CSR Court Reporter I N D E X WITNESS: DIRECT CROSS REDIRECT RECROSS EXAM ELGIN 21 24 132 81 WOLVERTON 138 140 DUKICH 146 148 238 243 192 HIRSCHKORN 247 250 284 287 269 EXHIBITS MARKED ADMITTED T-1 146 148 2 146 148 T-3 247 250 4 247 250 5 247 250 T-6 146 148 7 247 250 8 247 250 9 173 246 10 253 259 11 261 269 12 264 269 13 266 269 T-20 22 23 21 22 23 22 22 23 23 22 23 24 51 55 25 57 80 26 60 27 69 28 70 70 29 71 80 30 74 80 T-31 139 140 P R O C E E D I N G S JUDGE SCHAER: This hearing will come to order. This is a hearing in docket No. UE-971422 which is a filing by the Washington Water Power Company for a banded rate for new commercial customers taking electric service. The hearing is being held before Chairwoman Anne Levinson, Commissioner Richard Hemstad and Commissioner William Gillis. I am Administrative Law Judge Marjorie Schaer. Administrative Law Judge Dennis Moss is no longer presiding in this case due to scheduling conflicts. We will begin by taking appearances starting with the company, please. MR. MEYER: Thank you. Appearing on behalf of the company David Meyer and my address and other pertinent information has previously been supplied. JUDGE SCHAER: Certainly. And for the Commission staff, please. MR. CEDARBAUM: Thank you. Robert Cedarbaum, assistant attorney general. My address has also been previously noted. JUDGE SCHAER: Public counsel. MR. FFITCH: Simon ffitch, assistant attorney general for public counsel section of the Washington attorney general's office and my address is of record. JUDGE SCHAER: And for intervenors, please. MS. HORGAN: Melinda Horgan, and I'm here on behalf of the Industrial Customers of Northwest Utilities, and my address is also in record. JUDGE SCHAER: As regards to preliminary matters, I believe that counsel have discussed among them the order of appearance of witnesses today and, Mr. Cedarbaum, would you like to briefly describe that agreement, please. MR. CEDARBAUM: Yes, Your Honor. Since we're convened today to take cross-examination of all of the testimony the parties have agreed to put on the staff and intervenor cases first followed by the company's case in total, so the cross-examination will be of both the direct and rebuttal of the company witnesses. JUDGE SCHAER: Thank you. Would you like to call your first witness, please. MR. CEDARBAUM: I guess the staff witness is Kenneth Elgin. Whereupon, KENNETH ELGIN, having been first duly sworn, was called as a witness herein and was examined and testified as follows: DIRECT EXAMINATION BY MR. CEDARBAUM: Q. Would you please state your full name and spell your last name? A. Yes. My name is Kenneth Elgin, E L G I N. Q. Mr. Elgin, by whom are you employed and in what capacity? A. I'm employed by the Washington utilities and Transportation as the case strategist for the regulatory services division. Q. And you have prepared direct testimony on behalf of the Commission staff in this case? A. Yes, I have. MR. CEDARBAUM: Your Honor, if we could have marked for identification Mr. Elgin's direct testimony and three exhibits, please. JUDGE SCHAER: At this time I'm going to mark for identification as Exhibit T-20 exhibit now identified as KLE-T which is the testimony of Kenneth Elgin. As Exhibit 21 for identification exhibit marked KLE-2 which appears to be the experience of Mr. Elgin. As Exhibit 22 document marked as KLE-3, which was another exhibit of Mr. Elgin showing the Inland Power and Light Company service area outline, and as Exhibit 23, it's now identified as KLE-4, which is the exhibit of Mr. Elgin providing portions of the Inland Power and Light tariff. MR. CEDARBAUM: Thank you. (Marked Exhibits T-20, 21, 22 and 23.) Q. Mr. Elgin, referring you to Exhibit T-20, is that your direct testimony in this proceeding? A. Yes, Q. And this was prepared by you or under your supervision? A. Yes. Q. And it's true and correct to the best of your knowledge and belief? A. Yes. Q. Referring you to Exhibits 21, 22 and 23, are these exhibits that you have also prepared as part of your direct testimony? A. Yes. Q. And they are referenced within your direct testimony? A. Yes. Q. And these exhibits were prepared by you or under your supervision and direction? A. Yes. Q. And they're true and correct to the best of your knowledge and belief? A. Yes. MR. CEDARBAUM: Your Honor, I would offer Exhibits T-20 and Exhibits 21 through 23 into evidence, please. JUDGE SCHAER: Are there any objections? MR. MEYER: No objection. JUDGE SCHAER: Those documents are admitted. (Admitted Exhibits T-20, 21, 22 and 23.) MR. CEDARBAUM: I would just note for the record that in Mr. Elgin's testimony he refers to an Exhibit 2 of Mr. Hirschkorn. My understanding is that that number for Mr. Hirschkorn's exhibit will change later today and as long as the record reflects that for Mr. Elgin I think we're okay. JUDGE SCHAER: Thank you. Mr. Elgin, do you know what page that reference is on? THE WITNESS: I was going to look for a -- JUDGE SCHAER: Let's take a moment and look for it. THE WITNESS: The first reference is page 19, line 5. JUDGE SCHAER: That should be changed to Exhibit 5, page 5; is that correct? THE WITNESS: I believe so, yes. Then the next reference would be on page 22, line 16, and the question Exhibit 2 would be now Exhibit 5. JUDGE SCHAER: Thank you. THE WITNESS: I believe that's it, Your Honor. JUDGE SCHAER: Thank you very much. MR. CEDARBAUM: Thank you. The witness is available for cross-examination. JUDGE SCHAER: Do you have questions for Mr. Elgin, Mr. Meyer? MR. MEYER: I do. JUDGE SCHAER: Go ahead. CROSS-EXAMINATION BY MR. MEYER: Q. Good morning. Like to cover a number of different areas, of course. Let's begin, though, with arriving at a common understanding of just what your testimony says or assumes. With regard to the cost basis of any proposed rate and in particular with reference to schedule 23, are you assuming, Mr. Elgin, that the banded rate statute can only apply where there is a demonstrable difference in costs to serve between customers? A. No. Q. You are not. So is it your position that the banded rate statute can be used as a tool to differentiate pricing among two customers with the same costs to serve? A. No, that's not my testimony. Q. Well, then explain your prior testimony, your prior statement. A. Well, I think those answers are consistent. Q. Didn't you begin by saying this morning that you were not assuming, you were not assuming that the banded rate statute could only apply where there is a demonstrable difference in cost to serve? A. That's correct. Q. Let's assume two customers, customers A and customers B -- and I will try and make some simplifying assumptions here for the purposes of this cross-examination. Let's assume that customers A and B are customers served under the same tariff schedule and assume therefore that they presumably have roughly similar cost characteristics at least similarly enough to -- or similar enough to be grouped within the same schedule. Let's assume that customer A is subject to effective competition from a nonregulated supplier and that it is a nonresidential customer and that customer B is not. Are you with me so far? A. Well, I don't agree with your second assumption. I don't think the customers will be classified in same rate schedule based on cost. They would be primarily classed on the same rate schedule based on other characteristics, and then what the cost allocation process would do would then assign costs to those customers that are similarly situated and the Commission would determine rates. So I have a problem with the second assumption, but -- Q. Well, let's start over then. Customer A and customer B are in the same tariff schedule? A. That's correct. Q. Customer A has a competitive service alternative from another provider, customer B does not. A. Okay. Q. Is it your position that in that scenario the banded rate statute could not apply? A. Well, again, Mr. Meyer, my position in my testimony is that if two customers would take service under the same rate schedule, what the banded rate schedule says is that to the extent the service is subject to effective competition the banded rate may apply. So what you're saying is that because a customer may choose or be in the fortuitous position of having another provider of service for whatever reason that is effective competition, and my position is that is not effective competition. That's my testimony. And the purpose of this cross, as I understand the preamble, was to clarify my testimony. Q. Well, you're racing ahead of me. I'm just trying to determine whether it is your position and hence position of staff that the banded rate statute could be used to differentiate between customers within any particular class. Can it or can't it? A. No, it cannot. Q. It cannot? A. No. That's my position. Q. So therefore, given that position, the banded rate statute is no longer a tool, at least in your opinion, that can be used by a utility to differentiate among customers within any particular schedule, correct? A. Right, because the tariffs -- and my position is tariffs define a service. In this instance what the service that most schedules 21 and 23 define is commercial service. That service then is, to the extent that that's subjected to effective competition then that banded rate may apply, and my position is that if the banded rate is applied every customer is entitled to that service. Or, excuse me, that rate for service under that rate schedule. MR. MEYER: May I approach the witness? JUDGE SCHAER: Yes, you may. MR. MEYER: Record should reflect that I'm handing to the witness a copy of the RCW. Turn to section 80.28.075, the banded rate statute. JUDGE SCHAER: Mr. Cedarbaum, you may approach also if you would like to. MR. CEDARBAUM: I'm fine where I am. Q. You're familiar with the statute? A. Yes. Q. Now, does the statute anywhere on its face state or imply that it can only be used for the purpose of distinguishing among customers where such customers also have a difference in costs to serve? A. I've already answered that question. Q. Well, what does the statute say? A. Do you want me to read it? Q. Please. A. The statute? Q. Would you please. A. Is that your question? Q. Start by reading it and then we'll ask the question again. MR. CEDARBAUM: Your Honor, I guess I will object. The witness didn't have the statute given to him when he answered this question previously when he was asked the question as to the banded rate statute and he answered this question. It has been asked and answered. JUDGE SCHAER: I would like the witness to answer again. I don't think that it's going to unduly burden the record and if there's anything in the statute he wishes to refer to I would like him to be able to do that and give me his answer. Go ahead, please, Mr. Elgin. A. The statute reads, "Upon request by a natural gas company or an electrical company, the Commission may approve a tariff that includes banded rates for any nonresidential gas or electric service that is subject to effective competition from energy suppliers not regulated by the Utilities and Transportation Commission. 'Banded rate' means a rate that has a minimum and maximum rate. Rates may be changed within the band upon such notice as the Commission may order. Q. Thank you. Anywhere in the language of the statute is it stated or implied that the banded rates can only be used if a utility can demonstrate a difference in costs to serve? A. I've already answered that question. Q. And the answer is? A. No. Q. In your testimony you refer to RCW 80.28.100, and I don't have a citation, but that's a statute dealing with unreasonable preferences. Do you recall that reference? I believe you quote an excerpt from that in fact. A. Yes. It begins on page 10. MR. MEYER: Thank you. A. Line 20. MR. MEYER: May I approach the witness again? JUDGE SCHAER: Yes, you may. THE WITNESS: I have a copy of the statute before me. Q. Would you turn to it, please. Are you there? A. Yes. Q. It's short enough. Would you please read the text into the record. A. The text states, "No gas company, electrical company or water company shall directly or indirectly or by any special rate, rebate, drawback or other device or method, charge, demand, collect or receive from any person or corporation a greater or less compensation for gas, electricity or water or for any service rendered or to be rendered, or in connection therewith, except as authorized in this chapter, than it charges, demands, collects or receives from any other person or corporation for doing a like or contemporaneous service with respect thereto under the same or substantially similar circumstances or conditions." Q. Midway through your reading of that, does the language or the phrase, "except as authorized in this chapter" appear? A. Yes, it does. Q. Is the banded rate statute RCW 80.28.075 contained within the chapter? A. Yes. Q. Mr. Elgin, let's let the discussion move to really a more pragmatic or practical discussion of what it means or what it takes to become effective, and let's just set the statutes aside for the minute and sort of set the stage here. Do you acknowledge that at present Inland's rates for the commercial class are approximately 10 percent lower than those that Water Power can offer? A. No. Q. What's the cost disparities at present? A. Well, you asked me what Water Power can offer. Water Power can offer lower rates. Q. What is our tariff rate for schedule 21 and how does that compare for the tariff rate of Inland for similar customers? A. The current rates the disparity is approximately 10 percent. Q. That's what I was getting at. I didn't do it very artfully. A. No, you did not. Q. Come April 1, would you expect that disparity to grow? A. Yes. Q. To what degree of disparity? A. I believe Mr. Hirschkorn has testified to that. It's somewhere around 15 percent. Q. I believe it's closer to 19 percent. Would you accept that subject to check? A. Well, yeah. It would depend on because of the demand charge, but yes, somewhere between 15 and 19 percent, I will except that. Q. On the face of those numbers you don't then take issue with the calculation of that price difference, do you? A. No, I don't. Q. And the reason that that disparity or difference, if you will, grows as of April 1 of '98 is because of Inland's announced plans to reduce rates further -- A. Yes. Q. -- on April 1? Secondly -- again, this is all by way of sort of setting the factual stage, if you will -- do you take issue with the factual assertion in both Mr. Dukich's and Mr. Hirschkorn's testimony that since approximately October of '96 that Inland has captured approximately 97 percent of the new load where that load is at issue in the commercial class? A. No, I don't take any issue with that. Q. You don't have any other numbers to offer up in that regard? A. I have not done any study. I accept what the company has asserted in that regard. Q. Now, elsewhere and thirdly, don't you in your testimony acknowledge, and this is at page 18, lines 11-12 -- why don't we turn to that just so we're safe in making our reference here. Page 18, lines 11 through 12, I believe it is. Don't you state there, "Yes. There are potential benefits but the degree and magnitude of the benefits cannot be ascertained at this time"? A. Yes. Q. That's your testimony. And that testimony is in response to a question which reads at page 10, "Mr. Dukich asserts that there are benefits to certain ratepayers as a result of schedule 23 incremental revenues. Do you have any response to this testimony?" I accurately read the question? A. Yes, but you did not read the entire answer. Q. I understand. Now, you state in the portion of the answer that I did read that there are potential benefits but then you assert a caveat, if you will, that at least in your mind the degree and magnitude of the benefits can't be ascertained at this time. Do you understand that Mr. Hirschkorn has attempted to identify the potential benefits in terms of contributions to fixed costs as a result of schedule 23? A. Yes, he has. Q. And isn't it true that in his exhibit, which will be introduced later today -- I believe it is to be marked as Exhibit No. 5 -- that he identifies -- well, let's just turn to that. It might ease the discussion somewhat. Really it had been prefiled with an identifier as Exhibit 2, page 2? A. Yes, I have it. Q. And you understand that this was part of his -- sponsored as part of his direct testimony to be introduced later today? A. Yes. Q. And that you also understand that he has since prefiled rebuttal testimony? A. Yes. Q. And his rebuttal testimony refers to additional load at risk? A. Yes. Q. But just as to this piece set forth in the exhibit sponsored in his direct testimony, at the bottom of that page he identifies in the lower right-hand corner in the box a subset of customers called at risk customers? A. Yes. Q. Very last line he provides a figure of $357,716 "annual contribution to fixed costs"? A. Yes. Q. And do you understand from your reading of his rebuttal testimony that based on more recent projections that the contributions to fixed costs expressed on an annual basis could approach a million dollars? A. Yes. Q. Have you taken issue anywhere in your testimony with either of these factual assertions? A. Yes, I have. Q. And where have you challenged these numbers? A. I have not challenged the numbers. I have challenged and taken issue with the consequences and the company's assertions about the benefits and who benefits given regulatory lag in the short term, and as my testimony indicates, is, I have serious doubts as to how these benefits and margins eventually will benefit current ratepayers given the uncertainty regarding the electric industry in the future. So the only beneficiary I can say right now will be Water Power's shareholders and management of this million dollar additional contribution margin. Q. These contributions toward fixed costs, however they're quantified, will last into the future so long as those customers remain customers of Water Power, correct? A. I'm not sure I understand your question. Q. Well, you're adding in your last response kind of a time element. You're talking about in the near term. You're making an assertion about who benefits in the near term. My question to you is for any customer that's the beneficiary of a rate under schedule 23 that customer in all likelihood will remain a customer for perhaps decades to come? A. I don't know that. Given the uncertainty of what's happening in the electricity industry I don't know that. That's my point in my testimony. Neither does the company. Q. Okay. A. Can I finish? MR. CEDARBAUM: Excuse me, the witness has not finished his answer. Q. I'm sorry. A. These benefits would assume, you know, would assume that -- the traditional regulation would assume a rate case and that we could capture those benefits, and I don't know that that's necessarily a factual basis that we can determine that right now. Q. Even with a restructured environment, if these customers are physically attached to the distribution system, even if they're not purchasing their power and energy through the utility, are they apt to remain? What's your best guess? Are they apt to remain attached physically to the company's distribution system into the indefinite future? MR. CEDARBAUM: Your Honor, I will object on the basis of speculation. The question -- and that the question was asked and answered already. The witness testified he doesn't know and the company can't know either. JUDGE SCHAER: I think that this question is looking to a different aspect, Mr. Cedarbaum, in that it's asking about distribution, and if the witness is unable to answer it of course he will not need to answer it, but I think there is a difference there that maybe should be explored one question. Go ahead. A. Would you repeat the question, please. Q. Yes. Is it your best guess or best estimate that even in a restructured environment where a customer may or may not be prepared to purchase power and energy from other suppliers that if the customer is once attached physically to the distribution system of the utility that that customer is apt to remain physically attached for many years to come? A. No. Q. Let's talk a little bit about the territorial service agreements. You make passing reference to territorial service agreements? A. Do you have a cite, please? Q. Not at the ready but perhaps you won't need the specific cite. If you do I will try and dig one up for you. A. Page 5, I believe. Is that where you're talking about? JUDGE SCHAER: It would be helpful in your other questions if you have these kinds of references to have a page number, Mr. Meyer. Q. Is it your position -- let me ask it this way. Do you have any reason to believe that Water Power is not committed to the process of negotiating a new service territory agreement with Inland? A. I have no idea. Mr. Dukich has testified that the company is, but -- Q. You're not challenging that assertion, are you? A. No. Q. If this tariff schedule 23 were approved, and Water Power were allowed to price its services at a level that is competitive with rates for the same class charged by Inland, all else being equal, would you expect Inland to be somewhat more eager to reach a territorial agreement with Water Power? MR. CEDARBAUM: Your Honor, I will object. This witness can't testify as to what Inland's negotiating position is. I mean, there's testimony from Mr. Dukich on rebuttal that they're just starting the process. How can this witness know what a member party to that negotiation may or may not do in a process that has hardly begun. JUDGE SCHAER: Brief response, Mr. Meyer. MR. MEYER: Let me rephrase the question and I will subtract Inland from the equation and ask it more generally. JUDGE SCHAER: Thank you. Q. Suppose you have Water Power and you have competitor X. Competitor X has a decided price advantage over Water Power. With the ability of Water Power to match or come close to meeting that price of utility X instead of being at a disadvantage, would you expect that utility X to be more eager than before to reach a territorial agreement with Water Power? MR. CEDARBAUM: Your Honor, I'm sorry to be disruptive about this, but I also don't see the relevance to this question as well. The statute on banded rates sets out the statutory standards that this Commission should consider, and there have been suggestions of other criteria that might be applicable. Nowhere in any of these standards is there any relevance about some side negotiation of a service area agreement that in theory or in reality, whether it's started or hasn't started. I don't see the relevance to this line of questioning. JUDGE SCHAER: The objection is relevance, Mr. Meyer. MR. MEYER: Well, one of the issues that has been joined in this case through the prefiled testimony is whether there are other options to address these issues other than the approval of either -- other than or in addition to the approval of schedule 23. One of those other options was a territorial service agreement, so I'm just trying to explore with this witness whether given the approval of schedule 23, whether Water Power and the affected other utility are more or less apt to reach agreement on a territorial agreement as an alternative. That's all. It's just a simple question going to the concept. MR. CEDARBAUM: This witness has not suggested that option and it's not his burden to suggest that or any other option. Moreover, the service area agreement discussions that this witness raised had to do with the competitive situation that exists today both in certain -- in some areas of the company's service territory and in other areas of the company's service territory and had nothing to do with other options beyond this schedule 23 proposal. JUDGE SCHAER: I think it would be relevant to the Commission to know what its staff's thinking is on this issue, Mr. Cedarbaum, and as Mr. Elgin is the staff policy witness, staff only witness, I think if he does have any thoughts on this it would be useful to us. Go ahead, Mr. Elgin. A. Well, to answer your question, I think if the company were to lower all of its rates under schedule 21 that may be the proper way because it's not just this service territory agreement for this area, but it's potentially all service territory agreements wherever Inland and Water Power abut and for that matter Water Power and other public utilities. My issue with this is this selective capturing and pricing this, as I've described in my testimony, as a discriminating monopolist. Where the company has no competition it keeps its prices high and then those areas where customers are fortuitous enough to have an option there the company selectively discounts and provides the same service at a lower rate to similar customers, and that is not in the public interest and that's the basis of my testimony. Q. Let's turn back to mismarked Exhibit No. 2 of Mr. Hirschkorn's. You had that in front of you before? A. Yes. You have a reference to that again? Q. It's page 2 of his Exhibit No. 2 which would be subsequently numbered as Exhibit No. 5. That's when we were talking about contribution of fixed costs. A. Yes. Q. Now, in that middle bracket or boxed in that area there is a -- and admittedly this is just the stuff that we identified when we filed our direct case. By "stuff" I mean loads at risk in '99, and we've identified customers F, G, H, I, J, K, L, seven customers in that bracketed area? A. Yes. Q. Now, if the Commission decides not to approve a banded rate schedule, tariff schedule 23, let's explore what the company's options are as a practical matter. If Water Power were over the next six to 12 months to offer up special contracts for customers F, G, H, I, J, K and L -- A. Yes. Q. -- how does that lend itself to administrative efficiency? A. Well, I think we're dealing with the same issues in this case that the Commission would wrestle