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DIRECT TESTIMONY OF THOMAS E. KANDEL 1 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. 3 4 Q. WHAT IS YOUR POSITION WITH SOUTHERN MARYLAND ELECTRIC COOPERATIVE, INC. (“SMECO” OR THE “COOPERATIVE”)? 5 6 A. I am employed by SMECO as Senior Vice President of Finance and Administration. 7 Q. WHAT ARE YOUR RESPONSIBILITIES AS SMECO’S SENIOR VICE PRESIDENT OF FINANCE AND ADMINISTRATION? 8 9 A. and collections, customer billing, and certain customer service activities. 10 11 Q. DESCRIBE YOUR EDUCATIONAL BACKGROUND AND PROFESSIONAL EXPERIENCE. 12 13 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, 14 Oxford, Ohio in June 1970 and a Master of Business Administration degree from 15 Xavier University, Cincinnati, Ohio in January 1977. I majored in accounting during 16 my undergraduate program at Miami University and concentrated on a management 17 curriculum in the master’s degree program at Xavier University. 18 I commenced employment with SMECO in March 1996 as Vice President, 19 Finance and Administration. In December 1997, I was promoted to my current 20 position of Senior Vice President, Finance and Administration. 21 Prior to joining SMECO, I acquired extensive accounting and financial 22 experience with a number of other electric utilities. From June 1993 to March 1996, I 23 served as Consultant to the Comptroller and as Acting Chief Financial Officer for the 24 Virgin Islands Water and Power Authority in St. Thomas, U.S. Virgin Islands. In the 25 consultant capacity, I was responsible for the organization’s accounting activities with 26 particular emphasis on establishing and enhancing a number of internal controls. As 1 the Acting Chief Financial Officer, I was administratively responsible for the 2 organization’s accounting, treasury, and financing functions. 3 I was employed as Controller for the Indiana Municipal Power Agency, 4 Indianapolis, Indiana from December 1983 to August 1992. From August 1979 to 5 December 1983 I served as Administrative Assistant to the Chief Accounting Officer 6 of American Electric Power Service Corporation, Columbus, Ohio. I was employed 7 as Controller for Madison Gas and Electric Company, Madison, Wisconsin from 8 October 1977 to April 1979. From June 1970 to September 1977 I held the staff 9 positions of Accountant and Report Accountant with Columbus and Southern Ohio Electric Company (now, Columbus Southern Power Company), Columbus, Ohio. 10 11 I am a Certified Public Accountant (Ohio), and am a member of the American 12 Institute of Certified Public Accountants and the Maryland Association of Certified 13 Public Accountants. 14 Q. PLEASE DESCRIBE SMECO'S SERVICE TERRITORY. 15 A. SMECO provides electric service in all of St. Mary's and Charles Counties, the 16 extreme southern portion of Prince George's County, and all but the northeast corner 17 of Calvert County. Within these boundaries, SMECO serves over 118,000 customers 18 and operates approximately 8,500 miles of energized lines. During 1999, SMECO 19 had annual sales of 2,630,163,426 kilowatt-hours (“kWh”) and a system peak demand 20 of 632,005 kilowatts (“kW”). 21 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 22 A. First, I will describe how SMECO meets the power requirements of its customers. In 23 so doing, I will summarize relevant provisions in the Cooperative’s wholesale power 24 purchase contracts in effect during this Purchased Power Cost Adjustment (“PPCA”) 25 review period, as well as the buyout of the power supply contract with Potomac 26 Electric Power Company (“Pepco”). Last, I will describe the calculation of SMECO’s 27 PPCA under review in this case. These discussions and the accompanying exhibits 2 1 will show (1) the accuracy of SMECO’s PPCA calculations and (2) that SMECO’s 2 power purchase practices were both reasonable and prudent. 3 Q. PLEASE DESCRIBE HOW SMECO MEETS ITS POWER REQUIREMENTS. 4 A. SMECO meets all of its power requirements through a full-requirements contract with 5 Pepco; SMECO meets none of these requirements through self-generation. 6 SMECO's power supply relationship with Pepco has been governed by an 7 amended wholesale power agreement that was in effect from January 1, 1983 through 8 December 31, 1998 (“1983 Agreement”). The Seventh Amendment to the 1983 9 Agreement provided rates for the years 1996, 1997, and 1998, which include the first 10 two months of the 12-month PPCA review period of November 1998 through 11 October 1999 under review in this case. The Seventh Amendment was filed with the 12 Federal Energy Regulatory Commission (“FERC”) on January 26, 1996. 13 issued an order April 11, 1996 in which the Seventh Amendment was accepted and 14 made effective January 1, 1996. The amendment was filed with the Rural Utilities 15 Service (“RUS”) of the U.S. Department of Agriculture on April 22, 1996 and was 16 approved by the RUS on May 24, 1996. A copy of the Seventh Amendment and the 17 regulatory approvals are presented in Exhibit 1. 18 FERC On December 31, 1998 a new wholesale power agreement between SMECO 19 and Pepco was signed and submitted to FERC. 20 Agreement”) superceded in its entirety the 1983 Agreement and provides for 21 SMECO’s full wholesale electric power requirements for the three years 1999, 2000, 22 and 2001. The 1998 Agreement covers the last ten months of the PPCA period being 23 reviewed in this case. FERC issued an order on February 9, 1999 in which the 1998 24 Agreement was accepted and made effective January 1, 1999. The FERC application, 25 accompanied by a copy of the 1998 Agreement, and FERC’s February 9, 1999 order 26 are attached as Exhibit 2. 3 The new agreement (“1998 1 Q. BRIEFLY DESCRIBE THE WHOLESALE POWER COST SAVINGS 2 DESIGNED AND ACHIEVED THROUGH THE RATES IN THE SEVENTH 3 AMENDMENT THE 1983 AGREEMENT. 4 A. The rates for the period January 1, 1996 through December 31, 1998 under the 5 Seventh Amendment to the 1983 Agreement were designed as follows: 6 1) For 1996, the contract rates were designed to reduce SMECO’s wholesale power 7 costs by $2 million compared to 1995’s rates and using projected 1996 billing 8 determinants. 2) Contract rates for 1997 remained unchanged from those of 1996. 9 10 3) Contract rates for 1998 were designed to reduce SMECO’s wholesale power costs 11 by $4.5 million compared to 1995’s rates and using projected 1998 billing 12 determinants. 13 The actual 1996 results were that SMECO’s wholesale power costs were 14 almost $2,045,000 less under the 1996 rates than they would have been under the 15 1995 rates. SMECO’s actual 1997 wholesale power costs were $2,062,000 less (or 16 1.64 percent less) than what would have resulted using the 1995 rates. SMECO’s 17 actual 1998 wholesale power costs were $4,334,000 less (or 3.23 percent less) than 18 what would have resulted using the 1995 rates. 19 Q. THAN THE RATE DECREASE, DID THE SEVENTH AMENDMENT INCLUDE ANY OTHER CHANGES? 20 21 OTHER A. The Seventh Amendment essentially retained the same rate structure and contract 22 language incorporated in earlier agreements with three additional provisions. First, 23 the Delivery Point Supplement was revised to eliminate the need to file additions or 24 deletions of delivery points with FERC. Such language was added for the purpose of 25 providing additional service flexibility. 26 Second, Section 3 of the amendment provided that SMECO would not give 27 notice to Pepco pursuant to Section 7 of the Agreement prior to December 15, 1998. 4 1 The waiver of notice was included in consideration of the other changes included in 2 the Seventh Amendment. The waiver revision did not alter the existing contract term. 3 The contract term was 1) specified for a rolling ten-year period; 2) was extended for 4 an additional year on January 1 of each year if neither party gave termination notice 5 during the preceding year; and 3) could be reduced or terminated by SMECO only 6 with a minimum of five-calendar-years' notice to Pepco. If SMECO provided notice, 7 it could reduce its power obligations thereafter from Pepco by an amount not 8 exceeding 20 percent per year of SMECO's anticipated total system requirements. 9 Third, Rider GR-FA, the Fuel Rate, was revised to remove the provision for 10 including in the cost of fuel the cost of Emissions Allowances purchased and sold. 11 This provision, which was initiated in response to FERC actions, was no longer 12 deemed necessary by Pepco. 13 Q. SMECO AND PEPCO. 14 15 PLEASE BRIEFLY DESCRIBE THE NEW 1998 AGREEMENT BETWEEN A. Pepco and SMECO reached an agreement for Pepco to continue as SMECO’s full- 16 requirements supplier for a term of two or three years, at SMECO’s choice, beginning 17 in 1999. The total term of service under the new agreement is three years ending 18 December 31, 2001. SMECO, however, at its sole option could provide written 19 notice on or before January 15, 2000 of its election to reduce the total term of service 20 under the 1998 Agreement to two years terminating December 31, 2000. SMECO 21 provided this notice to Pepco on November 29, 1999. 22 In consideration to Pepco for entering a new agreement that shortened the term 23 that SMECO was obligated to take full requirements service and thereby eliminating 24 some income Pepco would have received from SMECO, SMECO agreed to pay a 25 buyout cost to Pepco. This buyout cost will be a $26 million lump-sum payment to 26 Pepco due January 16, 2001. 5 1 Under the 1998 Agreement with Pepco, the base demand and customer 2 charges to SMECO remain unchanged from their levels in 1998. The following 3 adjustments were made to the base energy charge. The base 1998 energy rate was 4 decreased by $0.002367 per kWh to roll the average fuel adjustment charge (“FAC”) 5 into the base energy rate. The FAC had been a separate monthly factor billed to 6 SMECO. Under the 1998 Agreement, the FAC has been eliminated and the average 7 charge has been rolled into the base energy charge. The decrease of $0.002367 was 8 greater than the FAC credit had been to SMECO in 1996, 1997, and 1998. 9 The other adjustment to the base energy charge in the 1998 Agreement is an 10 increase of $0.000264 per kWh. This adjustment is designed to collect a fee of 11 $1,500,000 from SMECO over the two years the 1998 Agreement is in effect. This 12 fee locks in the FAC credit at $0.002367 per kWh and eliminates the monthly 13 reconciliation between the projected FAC and the actual monthly FAC. When rates 14 were negotiated with Pepco for the 1996 to 1998 period, the projected FAC was a 15 credit of $0.0032 per kWh. Based on the actual FAC charges for those three years 16 ($(0.0022) in 1996, $(0.0019) in 1997, and $(0.0022) in 1998) SMECO’s actual FAC 17 costs were higher than the projected cost by $2.5 million in 1996, $3.3 million in 18 1997, and $2.7 million in 1998. Based on that experience SMECO believed it was 19 prudent to incur a $1.5 million charge to eliminate a variance that has cost SMECO 20 $8.5 million over the last three years. 21 Q. CUSTOMERS? 22 23 A. Wholesale power costs are recovered from SMECO's customers through base rate charges and a PPCA clause. 24 25 HOW DOES SMECO RECOVER WHOLESALE POWER COSTS FROM ITS Q. WHAT IS THE PPCA? 6 1 A. The PPCA is a rate mechanism which recovers changes in purchased power costs 2 billed to SMECO by its wholesale supplier, Pepco. The changes are computed in 3 relation to a base amount included in SMECO's base rates. 4 Q. WHAT ARE THE DETAILS OF THE PPCA COMPUTATION? 5 A. The PPCA is computed by subtracting a base amount from the current month's cost of 6 purchased power. Both the base amount and monthly power cost are expressed in 7 unitized terms (i.e., $/kWh or $/kW). 8 The base amount used in the PPCA calculation varies by tariff schedule. For 9 example, the PPCA equation applied to the Transmission Service tariff, Schedule T- 10 11, uses the base amounts $0.023690/kWh and $6.40/kW to compute the monthly 11 PPCA for transmission customers. In comparison, the PPCA equation applied to the 12 Residential and General Service tariffs, Schedules R-9 and GS-10, uses the base 13 amount $0.0480/kWh to compute the monthly purchased power cost adjustment for 14 residential and general service customers. 15 Q. DURING THE PERIOD UNDER REVIEW? 16 17 HAVE ANY CHANGES BEEN MADE TO THE PPCA CALCULATION A. Yes. As explained earlier, SMECO is obligated to make a lump-sum buyout payment 18 to Pepco of $26 million by January 16, 2001 for terminating the 1983 Agreement and 19 establishing the two-year term of the 1998 Agreement. On June 28, 1999, SMECO 20 filed a request with the Public Service Commission of Maryland (“Commission”) to 21 add a charge of $0.001 per kWh to its PPCA factor each month to begin recovery of 22 the buyout cost. The PPCA factor is computed the same as before, and then an 23 additional $0.001 per kWh component is added to the factor. In this way, SMECO 24 hopes to recover about $4 million by the end of 2000 towards the $26 million buyout 25 cost. SMECO estimates this will save SMECO and its customers over $460,000 in 26 financing costs related to the buyout. 27 Q. DID THE COMMISSION RULE ON SMECO’S JUNE 28, 1999 REQUEST? 7 1 A. Yes. At the Commission’s Administrative Meeting of July 28, 1999, the Commission 2 (1) held that the $26 million lump-sum buyout payment of the Pepco contract was 3 both reasonable and prudent and (2) approved SMECO’s recovery of accounting for 4 those buyout costs. In August 1999, SMECO initiated including the $0.001 per kWh 5 charge approved by the Commission in its PPCA factor and has continued to do so 6 every month thereafter. SMECO’s application to the Commission is attached as 7 Exhibits 3; the Commission’s July 28, 1999 order is attached as Exhibit 4. 8 Q. RECOVERED THROUGH THE PPCA? 9 10 WHAT COSTS OTHER THAN WHOLESALE POWER COSTS ARE A. Besides recovering changes in wholesale power costs, the PPCA is used to recover 11 load management credits, curtailable rider credits, and combustion turbine credits. 12 The load management and curtailable rider credits are payments made to SMECO's 13 customers to use less electricity during wholesale billing peak hours. The combustion 14 turbine credit is a monthly expense offset developed from a lease agreement with 15 Pepco. 16 Q. INCLUDED IN THE MONTHLY PPCA CALCULATION. 17 18 PLEASE ELABORATE ON THE COMBUSTION TURBINE CREDIT A. SMECO designed, financed, and constructed a 77 MW combustion turbine (“CT”) 19 generating plant pursuant to a 25-year agreement with Pepco. Pepco fuels, operates, 20 maintains, and dispatches the CT, which is located at Pepco’s Chalk Point generating 21 plant facility. Under the agreement, Pepco credits SMECO's monthly wholesale 22 power bill by $461,575. CT-related expenses, such as debt service, property tax, and 23 property rent are deducted from Pepco's payment to arrive at the monthly CT credit. 24 The CT credit is then applied as an expense offset in the monthly PPCA calculation. 25 The rate treatment pertaining to the CT was adopted by the PSC on February 26 25, 1988 following meetings with and the agreement of Commission Staff, People's 27 Counsel, and SMECO. On February 12, 1991, SMECO notified the PSC of its intent 8 1 to implement the CT credit adjustment in the PPCA calculation subsequent to 2 commercial operation and Pepco's acceptance of the CT facility on December 1, 1990. 3 The CT credits will continue throughout the 25-year term of the SMECO-Pepco CT 4 agreement. 5 Q. IS APPLIED. 6 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. 8 9 PLEASE IDENTIFY THE RATE SCHEDULES UNDER WHICH THE PPCA Q. DOES SMECO PERFORM ANY INTERNAL REVIEW PROCEDURES TO 10 ENSURE 11 BILLINGS? 12 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. 13 14 Q. IS THE PPCA MONITORED BY ANY REGULATORY AGENCY? 15 A. Yes, the PPCA is monitored by this Commission. Every month SMECO files its 16 PPCA worksheets with the Commission. In addition, the Commission Staff conducts 17 periodic audits, including on-site visits, to assure that purchased power costs are being 18 recovered according to established regulatory guidelines. 19 Q. PERIOD UNDER REVIEW? 20 21 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. 22 23 Q. DOES THIS COMPLETE YOUR TESTIMONY? 24 A. Yes. 9 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. * * * * * * 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