Download PSC Authorization - Maryland Public Service Commission

DIRECT TESTIMONY OF THOMAS E. KANDEL
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Q.
PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
2
A.
My name is Thomas E. Kandel. My business address is Southern Maryland Electric
Cooperative, Inc., 15035 Burnt Store Road, Hughesville, Maryland 20637.
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4
Q.
WHAT IS YOUR POSITION WITH SOUTHERN MARYLAND ELECTRIC
COOPERATIVE, INC. (“SMECO” OR THE “COOPERATIVE”)?
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A.
I am employed by SMECO as Senior Vice President of Finance and Administration.
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Q.
WHAT ARE YOUR RESPONSIBILITIES AS SMECO’S SENIOR VICE
PRESIDENT OF FINANCE AND ADMINISTRATION?
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9
A.
and collections, customer billing, and certain customer service activities.
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Q.
DESCRIBE YOUR EDUCATIONAL BACKGROUND AND PROFESSIONAL
EXPERIENCE.
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I am responsible for the Cooperative’s accounting, treasury, financing, rates, credit
A.
I was awarded a Bachelor of Science degree in Business from Miami University,
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Oxford, Ohio in June 1970 and a Master of Business Administration degree from
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Xavier University, Cincinnati, Ohio in January 1977. I majored in accounting during
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my undergraduate program at Miami University and concentrated on a management
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curriculum in the master’s degree program at Xavier University.
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I commenced employment with SMECO in March 1996 as Vice President,
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Finance and Administration. In December 1997, I was promoted to my current
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position of Senior Vice President, Finance and Administration.
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Prior to joining SMECO, I acquired extensive accounting and financial
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experience with a number of other electric utilities. From June 1993 to March 1996, I
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served as Consultant to the Comptroller and as Acting Chief Financial Officer for the
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Virgin Islands Water and Power Authority in St. Thomas, U.S. Virgin Islands. In the
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consultant capacity, I was responsible for the organization’s accounting activities with
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particular emphasis on establishing and enhancing a number of internal controls. As
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the Acting Chief Financial Officer, I was administratively responsible for the
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organization’s accounting, treasury, and financing functions.
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I was employed as Controller for the Indiana Municipal Power Agency,
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Indianapolis, Indiana from December 1983 to August 1992. From August 1979 to
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December 1983 I served as Administrative Assistant to the Chief Accounting Officer
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of American Electric Power Service Corporation, Columbus, Ohio. I was employed
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as Controller for Madison Gas and Electric Company, Madison, Wisconsin from
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October 1977 to April 1979. From June 1970 to September 1977 I held the staff
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positions of Accountant and Report Accountant with Columbus and Southern Ohio
Electric Company (now, Columbus Southern Power Company), Columbus, Ohio.
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I am a Certified Public Accountant (Ohio), and am a member of the American
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Institute of Certified Public Accountants and the Maryland Association of Certified
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Public Accountants.
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Q.
PLEASE DESCRIBE SMECO'S SERVICE TERRITORY.
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A.
SMECO provides electric service in all of St. Mary's and Charles Counties, the
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extreme southern portion of Prince George's County, and all but the northeast corner
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of Calvert County. Within these boundaries, SMECO serves over 118,000 customers
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and operates approximately 8,500 miles of energized lines. During 1999, SMECO
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had annual sales of 2,630,163,426 kilowatt-hours (“kWh”) and a system peak demand
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of 632,005 kilowatts (“kW”).
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Q.
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
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A.
First, I will describe how SMECO meets the power requirements of its customers. In
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so doing, I will summarize relevant provisions in the Cooperative’s wholesale power
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purchase contracts in effect during this Purchased Power Cost Adjustment (“PPCA”)
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review period, as well as the buyout of the power supply contract with Potomac
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Electric Power Company (“Pepco”). Last, I will describe the calculation of SMECO’s
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PPCA under review in this case. These discussions and the accompanying exhibits
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1
will show (1) the accuracy of SMECO’s PPCA calculations and (2) that SMECO’s
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power purchase practices were both reasonable and prudent.
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Q.
PLEASE DESCRIBE HOW SMECO MEETS ITS POWER REQUIREMENTS.
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A.
SMECO meets all of its power requirements through a full-requirements contract with
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Pepco; SMECO meets none of these requirements through self-generation.
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SMECO's power supply relationship with Pepco has been governed by an
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amended wholesale power agreement that was in effect from January 1, 1983 through
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December 31, 1998 (“1983 Agreement”). The Seventh Amendment to the 1983
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Agreement provided rates for the years 1996, 1997, and 1998, which include the first
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two months of the 12-month PPCA review period of November 1998 through
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October 1999 under review in this case. The Seventh Amendment was filed with the
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Federal Energy Regulatory Commission (“FERC”) on January 26, 1996.
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issued an order April 11, 1996 in which the Seventh Amendment was accepted and
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made effective January 1, 1996. The amendment was filed with the Rural Utilities
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Service (“RUS”) of the U.S. Department of Agriculture on April 22, 1996 and was
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approved by the RUS on May 24, 1996. A copy of the Seventh Amendment and the
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regulatory approvals are presented in Exhibit 1.
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FERC
On December 31, 1998 a new wholesale power agreement between SMECO
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and Pepco was signed and submitted to FERC.
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Agreement”) superceded in its entirety the 1983 Agreement and provides for
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SMECO’s full wholesale electric power requirements for the three years 1999, 2000,
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and 2001. The 1998 Agreement covers the last ten months of the PPCA period being
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reviewed in this case. FERC issued an order on February 9, 1999 in which the 1998
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Agreement was accepted and made effective January 1, 1999. The FERC application,
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accompanied by a copy of the 1998 Agreement, and FERC’s February 9, 1999 order
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are attached as Exhibit 2.
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The new agreement (“1998
1
Q.
BRIEFLY DESCRIBE THE WHOLESALE POWER COST SAVINGS
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DESIGNED AND ACHIEVED THROUGH THE RATES IN THE SEVENTH
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AMENDMENT THE 1983 AGREEMENT.
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A.
The rates for the period January 1, 1996 through December 31, 1998 under the
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Seventh Amendment to the 1983 Agreement were designed as follows:
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1) For 1996, the contract rates were designed to reduce SMECO’s wholesale power
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costs by $2 million compared to 1995’s rates and using projected 1996 billing
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determinants.
2) Contract rates for 1997 remained unchanged from those of 1996.
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3) Contract rates for 1998 were designed to reduce SMECO’s wholesale power costs
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by $4.5 million compared to 1995’s rates and using projected 1998 billing
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determinants.
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The actual 1996 results were that SMECO’s wholesale power costs were
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almost $2,045,000 less under the 1996 rates than they would have been under the
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1995 rates. SMECO’s actual 1997 wholesale power costs were $2,062,000 less (or
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1.64 percent less) than what would have resulted using the 1995 rates. SMECO’s
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actual 1998 wholesale power costs were $4,334,000 less (or 3.23 percent less) than
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what would have resulted using the 1995 rates.
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Q.
THAN
THE
RATE
DECREASE,
DID
THE
SEVENTH
AMENDMENT INCLUDE ANY OTHER CHANGES?
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OTHER
A.
The Seventh Amendment essentially retained the same rate structure and contract
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language incorporated in earlier agreements with three additional provisions. First,
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the Delivery Point Supplement was revised to eliminate the need to file additions or
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deletions of delivery points with FERC. Such language was added for the purpose of
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providing additional service flexibility.
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Second, Section 3 of the amendment provided that SMECO would not give
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notice to Pepco pursuant to Section 7 of the Agreement prior to December 15, 1998.
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The waiver of notice was included in consideration of the other changes included in
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the Seventh Amendment. The waiver revision did not alter the existing contract term.
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The contract term was 1) specified for a rolling ten-year period; 2) was extended for
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an additional year on January 1 of each year if neither party gave termination notice
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during the preceding year; and 3) could be reduced or terminated by SMECO only
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with a minimum of five-calendar-years' notice to Pepco. If SMECO provided notice,
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it could reduce its power obligations thereafter from Pepco by an amount not
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exceeding 20 percent per year of SMECO's anticipated total system requirements.
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Third, Rider GR-FA, the Fuel Rate, was revised to remove the provision for
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including in the cost of fuel the cost of Emissions Allowances purchased and sold.
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This provision, which was initiated in response to FERC actions, was no longer
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deemed necessary by Pepco.
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Q.
SMECO AND PEPCO.
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PLEASE BRIEFLY DESCRIBE THE NEW 1998 AGREEMENT BETWEEN
A.
Pepco and SMECO reached an agreement for Pepco to continue as SMECO’s full-
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requirements supplier for a term of two or three years, at SMECO’s choice, beginning
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in 1999. The total term of service under the new agreement is three years ending
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December 31, 2001. SMECO, however, at its sole option could provide written
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notice on or before January 15, 2000 of its election to reduce the total term of service
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under the 1998 Agreement to two years terminating December 31, 2000. SMECO
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provided this notice to Pepco on November 29, 1999.
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In consideration to Pepco for entering a new agreement that shortened the term
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that SMECO was obligated to take full requirements service and thereby eliminating
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some income Pepco would have received from SMECO, SMECO agreed to pay a
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buyout cost to Pepco. This buyout cost will be a $26 million lump-sum payment to
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Pepco due January 16, 2001.
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1
Under the 1998 Agreement with Pepco, the base demand and customer
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charges to SMECO remain unchanged from their levels in 1998. The following
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adjustments were made to the base energy charge. The base 1998 energy rate was
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decreased by $0.002367 per kWh to roll the average fuel adjustment charge (“FAC”)
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into the base energy rate. The FAC had been a separate monthly factor billed to
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SMECO. Under the 1998 Agreement, the FAC has been eliminated and the average
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charge has been rolled into the base energy charge. The decrease of $0.002367 was
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greater than the FAC credit had been to SMECO in 1996, 1997, and 1998.
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The other adjustment to the base energy charge in the 1998 Agreement is an
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increase of $0.000264 per kWh. This adjustment is designed to collect a fee of
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$1,500,000 from SMECO over the two years the 1998 Agreement is in effect. This
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fee locks in the FAC credit at $0.002367 per kWh and eliminates the monthly
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reconciliation between the projected FAC and the actual monthly FAC. When rates
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were negotiated with Pepco for the 1996 to 1998 period, the projected FAC was a
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credit of $0.0032 per kWh. Based on the actual FAC charges for those three years
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($(0.0022) in 1996, $(0.0019) in 1997, and $(0.0022) in 1998) SMECO’s actual FAC
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costs were higher than the projected cost by $2.5 million in 1996, $3.3 million in
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1997, and $2.7 million in 1998. Based on that experience SMECO believed it was
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prudent to incur a $1.5 million charge to eliminate a variance that has cost SMECO
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$8.5 million over the last three years.
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Q.
CUSTOMERS?
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A.
Wholesale power costs are recovered from SMECO's customers through base rate
charges and a PPCA clause.
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HOW DOES SMECO RECOVER WHOLESALE POWER COSTS FROM ITS
Q.
WHAT IS THE PPCA?
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1
A.
The PPCA is a rate mechanism which recovers changes in purchased power costs
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billed to SMECO by its wholesale supplier, Pepco. The changes are computed in
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relation to a base amount included in SMECO's base rates.
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Q.
WHAT ARE THE DETAILS OF THE PPCA COMPUTATION?
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A.
The PPCA is computed by subtracting a base amount from the current month's cost of
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purchased power. Both the base amount and monthly power cost are expressed in
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unitized terms (i.e., $/kWh or $/kW).
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The base amount used in the PPCA calculation varies by tariff schedule. For
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example, the PPCA equation applied to the Transmission Service tariff, Schedule T-
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11, uses the base amounts $0.023690/kWh and $6.40/kW to compute the monthly
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PPCA for transmission customers. In comparison, the PPCA equation applied to the
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Residential and General Service tariffs, Schedules R-9 and GS-10, uses the base
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amount $0.0480/kWh to compute the monthly purchased power cost adjustment for
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residential and general service customers.
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Q.
DURING THE PERIOD UNDER REVIEW?
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HAVE ANY CHANGES BEEN MADE TO THE PPCA CALCULATION
A.
Yes. As explained earlier, SMECO is obligated to make a lump-sum buyout payment
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to Pepco of $26 million by January 16, 2001 for terminating the 1983 Agreement and
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establishing the two-year term of the 1998 Agreement. On June 28, 1999, SMECO
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filed a request with the Public Service Commission of Maryland (“Commission”) to
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add a charge of $0.001 per kWh to its PPCA factor each month to begin recovery of
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the buyout cost. The PPCA factor is computed the same as before, and then an
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additional $0.001 per kWh component is added to the factor. In this way, SMECO
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hopes to recover about $4 million by the end of 2000 towards the $26 million buyout
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cost. SMECO estimates this will save SMECO and its customers over $460,000 in
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financing costs related to the buyout.
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Q.
DID THE COMMISSION RULE ON SMECO’S JUNE 28, 1999 REQUEST?
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1
A.
Yes. At the Commission’s Administrative Meeting of July 28, 1999, the Commission
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(1) held that the $26 million lump-sum buyout payment of the Pepco contract was
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both reasonable and prudent and (2) approved SMECO’s recovery of accounting for
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those buyout costs. In August 1999, SMECO initiated including the $0.001 per kWh
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charge approved by the Commission in its PPCA factor and has continued to do so
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every month thereafter. SMECO’s application to the Commission is attached as
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Exhibits 3; the Commission’s July 28, 1999 order is attached as Exhibit 4.
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Q.
RECOVERED THROUGH THE PPCA?
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WHAT COSTS OTHER THAN WHOLESALE POWER COSTS ARE
A.
Besides recovering changes in wholesale power costs, the PPCA is used to recover
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load management credits, curtailable rider credits, and combustion turbine credits.
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The load management and curtailable rider credits are payments made to SMECO's
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customers to use less electricity during wholesale billing peak hours. The combustion
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turbine credit is a monthly expense offset developed from a lease agreement with
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Pepco.
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Q.
INCLUDED IN THE MONTHLY PPCA CALCULATION.
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PLEASE ELABORATE ON THE COMBUSTION TURBINE CREDIT
A.
SMECO designed, financed, and constructed a 77 MW combustion turbine (“CT”)
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generating plant pursuant to a 25-year agreement with Pepco. Pepco fuels, operates,
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maintains, and dispatches the CT, which is located at Pepco’s Chalk Point generating
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plant facility. Under the agreement, Pepco credits SMECO's monthly wholesale
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power bill by $461,575. CT-related expenses, such as debt service, property tax, and
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property rent are deducted from Pepco's payment to arrive at the monthly CT credit.
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The CT credit is then applied as an expense offset in the monthly PPCA calculation.
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The rate treatment pertaining to the CT was adopted by the PSC on February
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25, 1988 following meetings with and the agreement of Commission Staff, People's
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Counsel, and SMECO. On February 12, 1991, SMECO notified the PSC of its intent
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1
to implement the CT credit adjustment in the PPCA calculation subsequent to
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commercial operation and Pepco's acceptance of the CT facility on December 1, 1990.
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The CT credits will continue throughout the 25-year term of the SMECO-Pepco CT
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agreement.
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Q.
IS APPLIED.
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7
A.
The PPCA is applied under the R-9, GS-10, and T-11 tariff schedules. Copies of
these tariff schedules are presented in Exhibit 5.
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PLEASE IDENTIFY THE RATE SCHEDULES UNDER WHICH THE PPCA
Q.
DOES SMECO PERFORM ANY INTERNAL REVIEW PROCEDURES TO
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ENSURE
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BILLINGS?
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A.
THE
ACCURACY
OF
PEPCO'S
WHOLESALE
POWER
Yes, SMECO reviews monthly wholesale billing determinants and rate applications to
ensure the accuracy of Pepco's wholesale power billings.
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14
Q.
IS THE PPCA MONITORED BY ANY REGULATORY AGENCY?
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A.
Yes, the PPCA is monitored by this Commission. Every month SMECO files its
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PPCA worksheets with the Commission. In addition, the Commission Staff conducts
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periodic audits, including on-site visits, to assure that purchased power costs are being
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recovered according to established regulatory guidelines.
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Q.
PERIOD UNDER REVIEW?
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WILL YOU PLEASE PROVIDE THE DETAILS OF THE PPCA FOR THE
A.
Yes. Attached as Exhibit 6 are the PPCAs with supporting worksheets for each of the
months November 1998 through October 1999.
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23
Q.
DOES THIS COMPLETE YOUR TESTIMONY?
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A.
Yes.
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BEFORE THE
PUBLIC SERVICE COMMISSION OF MARYLAND
IN THE MATTER OF THE
CONTINUING INVESTIGATION OF
THE ELECTRIC PURCHASED POWER
COST ADJUSTMENT CHARGES
OF SOUTHERN MARYLAND
ELECTRIC COOPERATIVE, INC.
*
*
*
*
*
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CASE NO. 8504(v)
PREPARED DIRECT TESTIMONY
OF
THOMAS E. KANDEL
ON BEHALF OF
SOUTHERN MARYLAND ELECTRIC COOPERATIVE, INC.
March 10, 2000
Exhibit 1
Seventh Amendment
To SMECO's
Wholesale Power Agreement
Exhibit 5
SMECO's Residential Service (R-9),
General Service (GS-10), And
Transmission Service (T-11) Tariff Schedules
Exhibit 2
December 31, 1998
Wholesale Power Agreement
Between SMECO and Pepco
Exhibit 3
June, 1999
SMECO Submission to PSC
For Buyout Cost Recovery through PPCA
(Excluding Confidential Attachments)
Exhibit 4
PSC Authorization
Of Buyout Cost Recovery Through PPCA
Exhibit 6
PPCA Worksheets
November 1998 – October 1999