SOAH DOCKET NO. 473-98-0090

PUC DOCKET NO. 17942

APPLICATION FOR APPROVAL	§	BEFORE THE

OF TIME-OF-USE RATE OPTIONS	§	PUBLIC UTILITY COMMISSION

FOR TEXAS UTILITIES ELECTRIC	§	OF TEXAS

COMPANY	§

TEXAS UTILITIES ELECTRIC COMPANY'S

POST-HEARING REPLY BRIEF

TABLE OF CONTENTS

(File Name: replybrf.wpd)

Table of Contents	1

I.	Introduction	3

II.	Nucor's Claims of Discrimination Are Without Merit	3

A.	This Proceeding Does Not Involve a Rate Decrease	3

B.	TU Electric Has No Burden of Proof Concerning Rates It Did Not Propose	4

C.	The Proposed Rates Are Not Discriminatory	5

D.	Interruptible Rates Are Neither Necessary Nor Appropriate	6

E.	Interruptible Customers Are Not In a Separate Rate Class	8

F.	The Existence and Experience of Interruptible RTP Rates Support TU Electric's Position	9

G.	The Same Load Cannot Be Both Curtailed and Interrupted	10

H.	Nucor's Savings Under Its Proposed Interruptible TOU Rates Are Unwarranted and Unreasonable	13

I.	Nucor's Proposed Interruptible TOU Rates Are Unreasonable
15

III.	Rate GTUC Is Just, Reasonable, and Revenue Neutral	17

A.	Rate GTUC Is Appropriately Priced and Is Revenue Neutral	17

B.	Rate GTUC is Just and Reasonable - Need is Not the Appropriate Standard	19

C.	Rate GTUC Produces Significant Levels of Curtailment	20

D.	Dr. Zarnikau's Proposed Modifications to Rate GTUC Are Unreasonable	22

IV.	Conclusion and Prayer	25

Certificate of Service	26

SOAH DOCKET NO. 473-98-0090

PUC DOCKET NO. 17942

APPLICATION FOR APPROVAL	§	BEFORE THE

OF TIME-OF-USE RATE OPTIONS	§	PUBLIC UTILITY COMMISSION

FOR TEXAS UTILITIES ELECTRIC	§	OF TEXAS

COMPANY	§

TEXAS UTILITIES ELECTRIC COMPANY'S

POST-HEARING REPLY BRIEF

TO THE HONORABLE ELIZABETH R. TODD, ADMINISTRATIVE LAW JUDGE:

For its Post-Hearing Reply Brief, Texas Utilities Electric Company ("TU Electric") respectfully submits the following:

I. INTRODUCTION

Nucor presents several arguments and claims in its Introduction. Because these are all presented in detail later in Nucor's brief, TU Electric sees no need to respond at this point, and will instead respond to the arguments and claims made by Nucor in the body of its brief.1

II. NUCOR'S CLAIMS OF DISCRIMINATION ARE WITHOUT MERIT

A. This Proceeding Does Not Involve a Rate Decrease

Nucor claims on page 5 that the proposed rates "amount to giving an unreasonably preferential general rate decrease to a select group of TU Electric's retail customers." This case does not involve a rate decrease. As detailed on pages 4-8 of TU Electric's Initial Brief, the proposed rates are designed to be revenue neutral. To the extent customers are able to lower their electric bills, it will be due to one of two reasons: (1) they respond to the price signals contained in the rates, including the curtailment period rate, and reduce load during the higher cost periods; or (2) certain customers will be able to lower their bills without changing consumption -- a situation that Nucor itself properly recognizes will occur to some extent because rates are set on averages. This case does not involve a "rate decrease" that is not being offered to interruptible customers.2

B. TU Electric Has No Burden of Proof Concerning Rates It Did Not Propose

Nucor argues on pages 5-6 that TU Electric had -- and still has -- some type of burden of proof to make a prima facie case as to why it was not proposing an interruptible time-of-use ("TOU") rate, claiming that the proposed rates are "facially discriminatory" since their availability is limited to the firm retail customer classes.3 As detailed on page 9 of TU Electric's Brief, there is no such discrimination -- facially or otherwise -- because the rates are available to all retail customers, including interruptible customers. Because Nucor's premise -- that the rates are impermissibly discriminatory -- is wrong, its conclusion -- that TU Electric has the burden to explain why it did not propose interruptible TOU rates -- is also wrong. The only burden of proof that TU Electric bears is to prove the reasonableness of the rates it has proposed; it has no burden of proof with respect to, and is not required in its application to address, rates it has not proposed. TU Electric has no more burden of proof to explain why it did not propose interruptible TOU rates than it has to explain why it is not offering a municipal pumping interruptible time-of-use rate or any other type of rate. See TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 8-9. Not surprisingly, Nucor fails to cite a single Commission case holding that a utility has the burden of proof to explain why it did not propose some type of optional rate.

On pages 6-7, Nucor cites the benefits that TOU rates can provide. Nucor then claims that TOU pricing would save Nucor $1.2 million and that this is "the amount by which TU Electric thus admits Nucor is damaged by TU Electric's unreasonable discrimination." TU Electric has made no such admission. The $1.2 million figure represents the totally unjustified and unwarranted savings that Nucor would obtain under its improper TOU rate proposals. This amount is not a "damage" to Nucor, but the amount of the unjustified windfall that would occur if Nucor's improper TOU rate proposals were adopted.

C. The Proposed Rates Are Not Discriminatory

Nucor (pp. 7-8) cites Dr. Zarnikau's testimony that excluding interruptible customers from TOU rates is discriminatory. As detailed above, this testimony does not apply the proper legal standard -- what is impermissible is "unreasonable discrimination," not simply "discrimination." Further, Dr. Zarnikau's testimony is also wrong -- interruptible customers are free to take service under Rates GTU or GTUC, as Dr. Zarnikau himself admitted. Nucor Exh. 3 (Zarnikau), p. 15. Nucor then suggests that this testimony was not rebutted by TU Electric. To the contrary, this entire concept was fully rebutted by Mr. Houle in his supplemental rebuttal testimony (TUEC Exh. 7 at pp. 3-10). Nucor also suggests that no other party offered any reason for TU Electric's not offering an interruptible TOU rate. While irrelevant -- TU Electric had the burden to justify its initial proposals and took the responsibility of supporting the modifications contained in the Stipulation -- it is clear that the signatories to the Stipulation found that the proposed rates were just and reasonable and fully in compliance with PURA. TUEC Exh. 4, p. 7.

Nucor next argues (p. 8) that the problem with Mr. Houle's testimony and TU Electric's position is that PURA "prohibits discrimination between and among customer classes." But the actual standard, as Nucor later admits, is "unreasonable discrimination."4 And, as detailed on pages 12-13 of TU Electric's Brief, the character of the service furnished -- firm versus interruptible -- is a reasonable and permissible basis upon which to differentiate customers.

Nucor next argues (pp. 8-9) that not all retail customers can take service under each of the three tariffs that have been proposed. Nucor correctly notes that Rate GTU is not available to residential customers, despite language in the tariff expressing availability to all customers. That is because the tariff is a General Service tariff. Tr., pp. 15-16, 241-42. Indeed, the same "applicability" language is found in TU Electric's existing Rate GS and Rate GP tariffs. Nucor argues on page 9 that it would have to "abandon completely its interruptible class status" in order to take TOU service. Once again, Nucor incorrectly states that interruptible customers constitute a separate rate class, when it is clear that the service which they are taking is nothing more than a rider, and the rates were set based upon the costs for the General Service and High Voltage rate classes, and not some independent interruptible rate class. As the Commission clearly stated:

Interruptible service is a rider to Rates GS, GP and HV, rather than a separate rate. The rates charged an interruptible customer are based on the charges contained in Rates GS, GP and HV.

Application of Texas Utilities Electric Company for Authority to Change Rates, Docket No. 11735, 20 PUC Bull. 1029, 1315 (1994).5 It is, of course, true that, if Nucor elected to take TOU service, it would no longer be taking interruptible service. But this is true of any customer voluntarily switching from one type of service to another. The point is that the choice is clearly up to Nucor -- which refutes Nucor's discrimination claims.

D. Interruptible TOU Rates Are Neither Necessary Nor Appropriate

Nucor admits on page 9 that interruptible customers are free, within any possible contractual constraints, to take service under Rates GTU or GTUC. Nucor argues, however, that it should not be required to take a service it does not want -- firm service -- in order to obtain time-differentiated pricing. The problem is that embedded cost, time- differentiated rates, such as the interruptible TOU rates proposed by Nucor, provide no additional benefit to TU Electric and its other customers. With firm service TOU rates, TU Electric and its other customers benefit, in part, by obtaining some level of peak load reduction in response to the TOU pricing signals. But TU Electric and its other customers already obtain that benefit of peak load reduction from interruptible customers in return for a substantial credit from firm rates. Interruptible TOU rates would provide no additional benefit to TU Electric or its other customers, but would instead simply provide interruptible customers with an unwarranted reduction in rates, as highlighted by the $1.2 million in savings that Nucor would obtain, without changing its consumption at all, under its proposed interruptible TOU rates. TUEC Exh. 7 (Houle Supp. Rebuttal), p. 12. Load that has already been voluntarily curtailed in response to the price signals contained in a TOU rate is no longer on the system available to be interrupted. Id., p. 14. Interruptible TOU rates such as Nucor's are designed to reflect the same benefit twice -- once for shifting the load off peak and a second for the load being interruptible. Tr., pp. 265-66. This is inappropriate and explains why TU Electric did not propose interruptible TOU rates; they will reduce TU Electric's revenues without providing any additional benefit to TU Electric or to its other customers.

Nucor notes on page 10 that there is no pricing counterpart in Rate GTUC to instantaneous interruptible service. That is true; instantaneous interruptible service currently receives a demand cost credit of approximately 75%. Tr., p. 274. But the lack of such pricing is not a mistake to be corrected; rather, it reflects the fact that TU Electric has more instantaneous interruptible service than it currently needs or that can benefit its system. See TU Electric Brief, pp. 23-24. Indeed, the Commission noted in Docket No. 9300 -- nearly 9 years ago -- that Dr. Zarnikau had testified on behalf of the Commission Staff that TU Electric's ability to use interruptible load to offset spinning reserve requirements had reached the saturation point. Docket No. 9300, 17 PUC Bull. at 2545.6 Nucor's proposal to develop an instantaneous interruptible TOU rate is clearly contrary to the public interest, as such a rate will provide no additional benefit to TU Electric's system.

Nucor argues on page 10 that conversion of interruptible customers to firm TOU rates would be detrimental to the system and require TU Electric to obtain additional peak load resources. This argument fails, for several reasons. First, while significant migration could occur in theory, in practice the history of the service does not support such a supposition. Only three noticed interruptible customers have switched to Rate GTUC so far, and two of those did so because they were not good candidates for interruptible service. TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 27-28, Tr., pp. 104-05, 316. Second, noticed interruptible customers who have been on the rate for less than two years have the right to opt out of noticed interruptible service at any time, so TU Electric must still take such customers into account in planning peak load requirements. Tr., pp. 250-51.7 Third, in the process of planning, TU Electric does not assume that it must obtain sufficient capacity to serve each and every customer as if they were to take service at the system peak; the actual amount of load shifting and curtailments experienced for Rate GTUC will be taken into account in determining the anticipated amount of peak load the class will place on TU Electric's system. Tr., pp. 108-12. Fourth, a migration of noticed interruptible customers to Rate GTUC would likely actually provide a benefit. If the noticed interruptible customers that switch to Rate GTUC do curtail during curtailment periods, this may help prevent the need for interruption of noticed interruptible customers, thus providing a benefit to noticed interruptible customers that would otherwise not exist if those switching customers had remained as noticed interruptible customers. TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 22-23. The curtailment period price specified in Rate GTUC has worked to produce significant peak load reductions through voluntary curtailments, while the buy- through price applicable in TU Electric's Rider I for noticed interruptible customers has been wholly inadequate to result in a single saved kWh. Id., pp. 15-16; Tr., p. 100. Thus, in practice, what migration is likely to occur will be more apt to be a benefit, rather than a detriment, to the system.

E. Interruptible Customers Are Not In a Separate Rate Class

Nucor argues that TU Electric's most incredible argument is that the interruptible customer classes are not truly rate classes. To the contrary, as detailed in Sections II.A and C, above, and on pages 9-10 of TU Electric's Brief, not only is TU Electric's position credible, it is in fact the truth, based upon the findings made by the Commission in Docket No. 11735 and in Docket No. 18490.

Nucor, in arguing that the Commission in Docket No. 18490 created two interruptible rate classes, states on pages 11-12 that Mr. Houle testified in Docket No. 18490 that the Cost of Service Study approved in that proceeding could be used in various Commission proceedings to implement rule changes and to reflect legislative changes. To be more precise, in that proceeding Mr. Houle noted that in the past cost of service studies had been used in such a manner in Commission proceedings; this past history thus justified the proposed adoption of a new cost of service study in Docket No. 18490 based upon the view that any restructuring bill passed by the Legislature likely would rely upon a utility's most recently approved cost of service study in allocating stranded costs, as did the proposed legislation in 1997. Nucor Exh. 3 (Zarnikau), Exh. JZ-S-13, pp. 2-3; Tr., pp. 36- 37. Nucor's claims that customer classes cannot be established for limited purposes is simply wrong. That is exactly what was done in Docket No. 18490, as the Commission itself stated in considering -- and adopting -- that revised cost of service study. See TU Electric's Brief, p. 10.

As for Mr. Houle's testimony that the instantaneous interruptible rates are underpriced, Nucor claims that this matter should have been addressed in Docket No. 18490. As Nucor knows full well, the purpose of that proceeding was to avoid the need for a costly and time-consuming general rate case in which that and numerous other ratemaking issues would have been explored in full. Rather, an across-the-board percentage rate decrease was adopted. But the simple fact that Docket No. 18490 was not intended to, and did not, address such matters provides no justification for ignoring the fact that, today, TU Electric has more instantaneous interruptible load than it can use and, thus, the rates for that service are too low in comparison to the benefits received from that load. Since that is so, it would be ludicrous to further reduce the price of instantaneous interruptible service under the guise of TOU pricing as Nucor proposes.

F. The Existence and Experience of Interruptible RTP Rates Support TU Electric's Position

Nucor argues on pages 12-13 that interruptible TOU rates are not redundant with TU Electric's experimental interruptible real-time-pricing ("RTP") rate RTP-I because RTP rates are marginal-cost-based rates. Later on page 13, Nucor argues that offering an interruptible TOU rate would not, as Mr. Houle testified, bias the experimental interruptible RTP rate. It bases this argument on Dr. Zarnikau's testimony that, if this bias did exist, then the proposed firm TOU rates would necessarily bias the results of the firm experimental RTP rate. TU Electric is certainly aware of the difference between embedded-cost-based rates (including the TOU rates involved in this proceeding) and a marginal-cost-based rate, such as the RTP rates. Mr. Houle's exact language was that: "A real-time pricing rate is a form of time-of-use rate. Another interruptible rate offering at this time could potentially bias the results of the experimental RTP-I rate, the outcome of which is to determine whether real-time pricing rates can be considered a resource option...." See Nucor Exh. 3 (Zarnikau), Exh. JZ-S-4; TUEC Exh. 7 (Houle Supp. Rebuttal), p. 9. TU Electric was rightly concerned that, in light of the smaller population of interruptible customers and the limited -- and now non-existent -- participation in its interruptible RTP rates, yet another TOU-type rate (and one not being offered on an experimental basis) would result in insufficient participation in the RTP rates to derive any meaningful results from those experimental rates. These concerns do not apply to firm service RTP or TOU rates because the universe of prospective participants is so much larger. Finally, as with noticed interruptible rates, the experience with the experimental interruptible RTP rate in Midlothian, Rate RTP-I-1, is that customers either have no ability, or no desire, to respond to hourly changes in price; rather, consumption often increased as the price increased. TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 9-10. This fact, coupled with the fact that the customers that had been on Rate RTP-I-1 have now switched back to regular interruptible service, indicates that although interruptible customers have the ability to be turned off within certain limitations, the ability to respond to time-of-use pricing has not been demonstrated. Id., p. 10. Nucor's arguments are without merit.

G. The Same Load Cannot Be Both Curtailed and Interrupted

On page 14, Nucor cites Mr. Houle's testimony that interruptible TOU rates might result in interruptible customers being off the system during peak load periods, when the interruptible load has its maximum value. In response, Nucor cites Dr. Zarnikau's testimony that equity dictates that interruptible customers should have the same opportunity to respond to time-differentiated signals as firm customers. What is most significant about this response is that it does not dispute or otherwise respond to Mr. Houle's basic point: load that is off the system during peak load periods cannot be interrupted and, thus, loses its value as interruptible load. Interruptible load receives a production cost credit because it can be interrupted. This lower rate is charged even if absolutely no interruptions take place; it is the ability to interrupt that is the benefit justifying the credit. If the load is not on the system during peak periods, then the ability to interrupt does not exist; the customer has received the lower rate, but TU Electric has received nothing of value in return. With the firm customer, just so long as its load is not on the system during peak load periods, whether in response to the base TOU rate differential or the curtailment period rate, the customer receives the benefit of the lower rates, and TU Electric and its other customers receive the benefit of the load not being on the system. If the customer does not remove its load, it effectively pays the firm service rates. With the interruptible customer, the rate credit is provided because TU Electric can interrupt the customer when needed for system emergencies. But if the interruptible customer is already off the system in response to the base TOU rates, then the value to being able to interrupt that customer has disappeared. TUEC Exh. 7 (Houle Supp. Rebuttal), p. 14. During an ERCOT Condition 2 System Emergency, if TU Electric is deficit, then all TU Electric noticed interruptible and instantaneous interruptible customers are subject to be interrupted. Id., Exh. SJH-SR-1.8 But there is no additional value added by the "ability" to interrupt phantom load. Id., p. 14. It is this difference between firm and interruptible customers that explains why a TOU rate for interruptible customers is not appropriate.

Nucor argues on page 14 that Mr. Houle expressed the same fears concerning RTP rates, but then agreed to their implementation. But what Nucor fails to mention is that the agreement was based upon a settlement that provided for experimental rates with a limited time period (3 years for firm customers, 4 years for interruptible customers), and with a limited number of customers (10 each for noticed and instantaneous interruptible customers; for firm customers, 25 the first year, 60 the second year, and 100 the third year). Tr., pp. 161, 212, 260; see Rates RTP and RTP-I. Such a limited experiment is a far cry from Nucor's proposed interruptible TOU rates, which are not experimental rates and would have no limits as to either the number of customers who could subscribe or the length of time that the rates would be available.9 Nucor also argues on page 14 that the period 4 price signal under the Midlothian rates was even more severe than under Dr. Zarnikau's proposed instantaneous interruptible rates, "without any apparent deleterious results." Contrary to Dr. Zarnikau's testimony, the simple fact of the matter is that the rate, which is properly priced, is currently so unattractive that the only two customers quit taking service under that rate.

Nucor also states (pp. 14-15) that the interruptible TOU rates in effect in Midlothian on an experimental basis "amounts to an interruptible time-of-use rate...." As noted earlier, a RTP rate is a type of TOU rate. While the Midlothian rate no longer prices fuel on a marginal basis, as it did before, it prices capacity on a marginal cost basis. Tr., pp. 260-62. This change was made in response to the customer's request, in that the customer wanted to focus on marginal capacity costs and not on marginal fuel costs and, being an experimental rate, TU Electric was willing to "give that a shot." Tr., p. 264. But because capacity is still based on marginal costs, the Midlothian interruptible RTP rate remains a RTP rate, and not an embedded-cost RTP rate. Further, the Midlothian RTP rate also is an experimental rate that will be in effect for a total period of only four years, unlike the TOU rates proposed in this proceeding or the interruptible TOU rates that Nucor has proposed.

On page 15, Nucor suggests that Mr. Houle's testimony concerning whether interruptible customers will actually respond to price signals is contradictory. A review of the full testimony shows nothing of the sort. Mr. Houle noted that, to date, interruptible customers have not shown a positive response to price signals but that, if they switched to Rate GTUC, then they might, over time, respond to those price signals. Tr., pp. 308-10. This testimony is consistent and rational. With the exception of those customers that can save money without changing usage patterns, customers will only switch to Rate GTUC if they are sensitive to price and plan to reduce costs by changing their usage patterns.

H. Nucor's Savings Under Its Proposed Interruptible TOU Rates Are Unwarranted and Unreasonable

Nucor argues on pages 15-17 that, because certain customers would obtain savings by switching to Rate GTUC and not modifying consumption, there is nothing improper about its proposed interruptible TOU rates, whereby it would save approximately $1.2 million without changing its consumption at all. But Nucor fails to recognize that the reason those customers would save money under Rate GTUC is because their load patterns make that possible. What Nucor has failed to do is show that the $1.2 million in savings it would receive under its proposed interruptible TOU rate occurs solely due to its load pattern, and not because the rates are further underpriced. Does Nucor have a load pattern similar to that of many churches and school districts -- two of the customer groups that would save money? Tr., p. 353. Does Nucor have an "off-peak" profile, like many churches do? Nucor Exh. 9, p. 3. Certainly not. The evidence is that Nucor is a high load factor customer that runs flat out whenever possible. Tr., pp. 310-12; TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 15-16 and Exh. SJH-SR-3. Dr. Zarnikau's own example shows that, with no change in usage, a low-load factor customer can save money by switching to Rate GTU, while a high load factor customer would pay more. Nucor Exh. 3 (Zarnikau), p. 39. What Nucor has totally failed to show is that the savings it would reap under its proposed rates are because of its current load pattern, i.e., Nucor has failed to show that it is a low-load factor customer and thereby has less on-peak usage than off-peak usage. Rather, the evidence is that Nucor is a high-load factor customer with substantial on-peak usage that has never expressed any interest in changing its load pattern to take advantage of time differentiated pricing. Tr., p. 311. As a result, Nucor has not disputed that it would pay more under Rate GTUC than it currently pays.10 That Nucor will not save money under Rate GTUC but would save money on its proposed interruptible TOU rates proves that Nucor's savings under its proposed interruptible TOU rates result from improper underpricing, rather than the beneficial nature of Nucor's load pattern.

On page 18, Nucor argues that, irrespective of whether a customer is on an interruptible rate or not, the remaining cost of service still varies by time period and interruptible customers should be eligible for such time-differentiated service. TU Electric does not disagree that cost of service varies by time period for all types of customers. The problem is that, if the time-differentiated rates have caused an interruptible customer to remove its load from the system, that load cannot be interrupted by TU Electric. That load no longer has the same value to TU Electric and no longer warrants the same credit as is appropriate for interruptible load being served on a non-time-differentiated rate. Thus, the amount of the credit given for interruptible service is not appropriate for an interruptible TOU rate. As Mr. Houle stated in a discovery response concerning whether it would be possible to design an interruptible TOU rate:

While it may be possible to develop a reasonable interruptible time-of- use rate under a static set of conditions, the "payment made" to such customers may over-compensate for the ability to remove or reduce on-peak usage. Also, time-of-use pricing sends a signal that encourages customers to reduce or eliminate usage during peak periods, but, often, that is when interruptible load (particularly instantaneous interruptible load) has its maximum value, so that the interruptibility function is available to restore system stability in times of emergency, such as generating units trips.

Nucor Exh. 3 (Zarnikau), Exh. JZ-S-5. While it may be theoretically possible to design an appropriate interruptible TOU rate, Nucor has not provided any evidence to allow this Commission to even attempt to accurately determine the value of interruptible load that may not be on line due to the customer's decision to remove load due to the higher prices found in peak and near-peak periods.

In response to Mr. Houle's testimony that Nucor's proposed interruptible TOU rates provide a double credit, Nucor argues on page 18 that Rate GTUC customers receive a noticed interruptible credit for curtailability and another rate reduction if they shift load from higher-priced to lower-priced time periods. This is not a double credit as exists with respect to Nucor's proposed interruptible TOU rates. The Rate GTUC customers pay the appropriate cost based upon the time period during which they obtain service, based upon the assumption that their load will be off line during curtailment periods. If their load remains on the system during curtailment periods, then the total cost is essentially the same as under the firm rates. Tr., p. 77. Significantly, to receive the full credit equal to the noticed interruptible credit, these customers must curtail not only during periods when curtailment is mandatory for noticed interruptible customers -- when the TU Electric system is capacity short -- but a significant number of hours when the system is at or near the peak. These customers are thus receiving a lower rate in return for removing load from the system prior to peak conditions, thereby helping to stave off any mandatory interruptions due to a capacity shortage on the TU Electric system. TUEC Exh. 7 (Houle Supp. Rebuttal), p. 22. Noticed interruptible customers, however, are receiving a reduced rate not because their load is off the system during peak periods, but because that load is on the system during mandatory interruption periods and can be involuntarily interrupted by TU Electric. If they are not on the system, they cannot be interrupted and, therefore, they do not provide any benefit to TU Electric and its other customers in exchange for the reduced rates that they otherwise receive. This lack of benefit to TU Electric and its other customers is even more pronounced for instantaneous interruptible customers. See TU Electric Brief, p. 24.

I. Nucor's Proposed Interruptible TOU Rates Are Unreasonable

In Section III (pp. 18-21) of its Brief, Nucor basically repeats its earlier arguments that the lack of interruptible TOU rates is unreasonably discriminatory and sets out its proposed rates. For the most part, no additional discussion is needed of the many flaws in Dr. Zarnikau's proposals beyond that already set out in TU Electric's Brief (pp. 20-27). With respect to the few issues that have not previously been addressed, TU Electric will below show the fallacy of Nucor's arguments.

On page 19 (note 8), Nucor argues that Mr. Houle's testimony -- that, if an instantaneous interruptible rate is provided at all, it should be limited to customers currently not receiving instantaneous interruptible service -- is "pure petulance." Such a statement simply highlights that Nucor does not understand, or chooses to ignore, the problems inherent in its proposals. Mr. Houle's testimony is perfectly logical and reasonable. With respect to load that is currently receiving instantaneous interruptible service, TU Electric is already receiving whatever benefit to the system such load can provide. Under Nucor's proposed Rate GTU-II, those customers will pay less while, at the same time, the benefit to the system will decrease. See TU Electric Brief, pp. 23-24. If the Commission were to erroneously require instantaneous interruptible TOU service, then from the perspective of TU Electric's system, it is preferable to gain whatever benefit that new interruptible load can provide -- although that benefit will certainly not be anywhere close to the discount such load would receive (TU Electric Brief, pp. 26-27) -- rather than switch existing instantaneous interruptible load to the new rate and receive even less benefit, and less revenue, than what TU Electric already obtains from that load. Further, from an equity standpoint, if a new instantaneous interruptible rate is offered, it is only fair to offer it to customers who are not currently receiving instantaneous interruptible service. While closing a type of service to new customers is clearly permissible under PURA, the customers currently receiving service under that closed rate should not even be eligible to obtain service under a newly available variation of that same type of service.

With respect to the value of instantaneous interruptible service, Nucor argues that Mr. Houle's testimony that the service is oversubscribed and thus underpriced contradicts the positions Mr. Houle took in Docket No. 18490. As noted above in Section II.E, that proceeding was a stipulated, across-the-board rate reduction proposal. It was not intended, and did not, determine the reasonableness of any existing tariffed rate.11 In Docket No. 18490, the issue was whether the Stipulation as a whole was just and reasonable and in the public interest. Mr. Houle's testimony in Docket No. 18490 was that the 28.5% production allocator for instantaneous interruptible was supported by "current rates" -- i.e., that is the allocator level upon which the charges found in Rider I are currently based -- and was consistent with prior Commission decisions. Nucor Exh. 3 (Zarnikau), Exh. JZ-S-13, pp. 3-4. Mr. Houle did not indicate that this production cost allocator was supported by "current costs" or the actual value of the benefits currently being received from that service. The allocator was appropriate solely because interruptible rates were not being changed (other than as part of the across-the-board percentage rate decrease). Significantly, Nucor does not cite any evidence that would suggest that Mr. Houle's testimony that TU Electric has more instantaneous interruptible load than it can use is incorrect. Indeed, considering that: (1) as noted in Section II.D, Dr. Zarnikau himself in 1990 testified that TU Electric's ability to use interruptible load to offset spinning reserve requirements had reached the saturation point; (2) the Commission in 1994 found that "Because the Company currently has more of this type of load than is required, continued expansion of that load will not benefit the Company, or its firm load customers", 20 PUC Bull. at 1316; and (3) the Commission's finding was made with respect to the lower level of instantaneous load that existed at the time TU Electric filed its rate case in 1993, and not the much higher amount of such load that was on TU Electric's system when the rate was actually closed (Tr., p. 256), it is clear that TU Electric has more instantaneous interruptible load than it can use and that any proposals that would either allow more such load -- or that would reduce either the rates paid by, or benefits received from, that service -- would be unreasonable and contrary to the interests of both TU Electric and its firm customers.

III. RATE GTUC IS JUST, REASONABLE, AND REVENUE NEUTRAL

A. Rate GTUC is Appropriately Priced and Is Revenue Neutral

In the second paragraph on page 22, Nucor argues that the evidence shows that Rate GTUC will not avoid production capacity costs commensurate with the noticed interruptible discount. What is significant about this paragraph is the total lack of citation to any evidence whatsoever to support the bald claims made therein. As detailed on pages 7-8 and 13-14 of TU Electric's Brief, Rate GTUC is appropriately designed to be revenue neutral, and the rate reductions will properly reflect the amount of curtailment that actually takes place. For example, assume that the experience with the Rate GTUC class is that it curtails 20% of its load during the system peak. If the total load under Rate GTUC is 100 MW, then TU Electric will plan on only having to meet 80 MW of that load. See Tr., pp. 108-11. And, as a result of the curtailment pricing provisions, because the class did not curtail 100% of its load, it will receive the benefit of only a portion of the 45% demand cost credit used in developing those rates.

Nucor returns to this subject on pages 27-29. There, Nucor repeatedly discusses what TU Electric "predicted" or "estimated" or "presented." As Mr. Houle explained, TU Electric did not tell any customer what to expect regarding the annual number of curtailment hours in the future. TUEC Exh. 7 (Houle Supp. Rebuttal), p. 32. TU Electric did communicate historical numbers, but no one can predict the future -- and these sophisticated customers would most certainly know that TU Electric was only providing historical data. Id. Further, with respect to customer presentations, TU Electric generally provided information based upon the five-year average (66 hours), ten-year average (43 hours), the number of curtailment hours specified by the prospective customer, or, as used by Mr. Houle in his own presentations, 100 hours. Tr., pp. 132-36, 138-40.12

Nucor states that Mr. Houle's revenue neutrality testimony is based solely on what occurred during 1998, which was an unusually hot summer. What Mr. Houle did was take the only actual data available to him, which was, of course, the 1998 data. However, as Mr. Houle testified, it is the design of the rate, not the actual results -- particularly the results of the first year or two, when the customers taking service will most likely be the customers that can save the most money under that rate -- that is most important. Tr., pp. 345-46, 348. While Nucor continually argues that, in a normal year, the rates will not be revenue neutral, it fails to quantify the level of reduced revenues -- as compared to firm rates -- such a "normal" year will produce; it fails to compare the reduction in revenues to the reduction in load at the peak that corresponds to that reduction in revenues; and it fails to show that the reduction in revenues is not more than offset by the benefit of the reduction in peak load. The design of the rates and the actual experience to date -- which does not even include the higher 70¢/kWh curtailment period charge -- support the revenue neutrality of Rate GTUC. While Nucor throws out various data and assumptions and arguments, ultimately, it has failed to show that Rate GTUC is not properly designed. Indeed, considering that Dr. Zarnikau's own proposed interruptible TOU rates are based upon the very price periods and rates contained in Rate GTUC (although without the curtailment period option), Nucor has once again adopted a schizophrenic argument -- "Rate GTUC is not revenue neutral and should not be adopted, but please adopt my proposed interruptible TOU rates, which just so happen to be based upon TU Electric's rate design and are therefore revenue neutral because of that fact." Nucor is wrong on both accounts; Rate GTUC is revenue neutral while, as detailed on pages 24-27 of TU Electric's Brief, Nucor's proposed interruptible TOU rates are not revenue neutral.

B. Rate GTUC is Just and Reasonable - Need is Not the Appropriate Standard

Nucor argues on page 23 that the evidence of a need for Rate GTUC is contradictory at best. Nucor bases this claim on the information and data in Project No. 19827. With respect to TU Electric's near-term resource requirements, TU Electric and the Commission Staff have arrived at slightly different figures, with the Staff's being about 2% higher than TU Electric's. But while Rate GTUC will encourage customers to engage in effective demand-side management activities, and therefore will be beneficial as a resource option, whether Rate GTUC is just and reasonable does not depend upon whether or not TU Electric has a current capacity need in 1999 or 2000. TU Electric is not requesting approval of Rate GTUC based on the various figures that have been presented in Project No. 19827; as Nucor points out elsewhere, Rate GTUC was proposed and placed into effect on an interim basis before the hot summer of 1998 and before that hot summer led to the establishment of Project No. 19827. As with any optional rate -- including interruptible rates -- TU Electric does not strictly "need" the rate. Indeed, "need" is not a prerequisite for approval under PURA. Rates must be "just and reasonable;" "need" is the standard applicable to certificates of convenience and necessity. See PURA § 37.056(c)(2). Rather, the objectives of the proposed rates are to: (1) provide customers with additional flexibility regarding pricing options; (2) encourage customers to engage in effective demand side management activities; and (3) reflect TU Electric's cost of service. TUEC Exh. 3 (Houle Direct), p. 9. Rate GTUC meets those objectives.

With respect to Dr. Zarnikau's opinion that Rate GTUC gives an essentially meaningless discount for what amounts to a cosmetic commitment to curtail, repeated by Nucor on page 24 of its Brief, the fallacy of that position has already been detailed on pages 16-17 of TU Electric's Brief.

C. Rate GTUC Produces Significant Levels of Curtailment

Nucor suggests on page 25 that changing the curtailment period price from 50¢/kWh to 70¢/kWh will cause Rate GTUC to not be revenue neutral. Considering that, on the previous page of its brief, Nucor complained that the discount under Rate GTUC was too large, it is clear that Nucor -- and the testimony of Dr. Zarnikau upon which Nucor relies -- cannot decide whether to argue that the discount is too large -- i.e., the rate is too low -- or whether to argue that TU Electric will obtain too much revenues. With respect to the claim that the rates are not revenue neutral, the data show that -- not factoring in the value of the reduction in demand caused by the curtailments -- the revenues have been $1 million less (2.6%) than absolute revenue neutrality. TUEC Exh. 7 (Houle Supp. Rebuttal), p. 31. The increased curtailment period charge should cause this difference to narrow and offer reasonable protection against loss of revenues. Id. Further as detailed in TU Electric's Brief (pp. 7, 13-14), the reduction in peak load must also be considered, and in that respect the benefits received by TU Electric and its customers more than offset the reduction in revenues. Id., pp. 31-32.

Nucor then argues (pp. 25-26) that, on average, there has been little actual curtailment under Rate GTUC. But Nucor focuses on "average demand," which has no meaning in determining actual curtailments. Tr., pp. 365-68. Average demand will combine the average load a customer places on a system at 4:00 a.m. with the load placed on at 4:00 p.m., but in order to determine the actual level of curtailments, one must look at what the customer's load would have been during the curtailment period -- the load at 4:00 p.m. -- and not the much lower load that existed at 4:00 a.m. Tr., pp. 365-66. The easiest way to show the fallacy of Nucor's approach is to use a simple example. Assume that a customer has a load of 60 MW from 12:00 midnight to 12:00 noon, and a load of 120 MW the other 12 hours of the day. The "average load" for that customer would be 90 MW. Now, assume that during curtailment periods -- which occur during the afternoon hours when the customer's load is 120 MW -- the customer reduces its load by 20% -- 24 MW. The customer's "average load" during curtailment periods would be 96 MW, while that customer's annual "average load" would be 90 MW. Under Nucor's approach, the customer's level of curtailment would be negative (90 − 96 = −6), even though it is clear that the customer curtailed load by 24 MW. It is just a fluke occurrence that the Rate GTUC "average load" figure turned out to be very close to the "average load" during curtailment periods, with the "average" curtailment period load being slightly higher than annual "average" load.

In sum, in order to make a valid determination, one must look at the load before, during, and after actual curtailment hours in order to approximate the amount of load that was curtailed. The "average demand" figure calculated by Nucor is totally useless except for rate design purposes, when it is used in determining "average demand" for the "average and excess" rate allocation methodology. Tr., p. 363-64, 365-66. That Nucor would even advance such a conceptually incorrect argument highlights Nucor's disregard for the facts as it single-mindedly endeavors to obtain an interruptible TOU rate.

Nucor then argues on pages 26-27 that TU Electric has made no showing that customers would respond "when really needed," which Nucor defines as during a system emergency. As detailed in TU Electric's Brief, pp. 15-16, Nucor's continued attempts to have Rate GTUC be just another type of interruptible rate are misguided and wrong. Rate GTUC is a firm rate. The Rate GTUC customer has every right to take service during all hours, just as does every other firm customer on TU Electric's system. The purpose of Rate GTUC is not solely to remove load during system emergencies. The purpose is broader than, and different from, that narrow goal. Rather, one of the purposes of Rate GTUC (and Rate GTU) is to encourage peak load reductions in advance of the declaration of an ERCOT emergency, in the hope that curtailments may help to prevent the declaration of such an emergency in the first place. TUEC Exh. 7 (Houle Supp. Rebuttal), pp. 22-23. See Brief, pp. 18-19. Nucor either misunderstands, or deliberately obfuscates, the intent of Rate GTUC.

Nucor also complains on pages 26-27 that Rate GTUC customers may not remove load during a curtailment request and, thus, not provide the capacity savings warranted by the Rate GTUC discount. As Mr. Houle testified, if Rate GTUC customers do not in fact curtail, the customer's total cost will be about the same as under the firm rate. Tr., p. 77.

D. Dr. Zarnikau's Proposed Modifications to Rate GTUC Are Unreasonable

On page 29, Nucor outlines Dr. Zarnikau's proposed changes to Rate GTUC. The many flaws in those proposals are highlighted on pages 15-20 of TU Electric's Brief. On page 30, Nucor states that Mr. Houle completely misses the point of Dr. Zarnikau's proposals, in that Dr. Zarnikau "does not wish to wrench an extensive number of expensive and irrelevant buy-throughs from curtailable customers." To the contrary, Mr. Houle did not miss the point; Nucor has. As detailed in TU Electric's Brief, Nucor does not, or will not, see that Rate GTUC is not designed to simply be an interruptible TOU rate. Dr. Zarnikau's changes would do nothing more than turn it into an interruptible TOU rate; non-emergency curtailments would be very limited and at a price that would produce little if any curtailment, while emergency curtailment periods would be priced so punitively as to almost assuredly cause the customer to curtail. Further, Nucor states that emergency curtailments would occur whenever ERCOT has required interruption of interruptible loads. But it must be emphasized that ERCOT has several emergency conditions. See TUEC Exh. 7 (Houle Supp. Rebuttal), Exh. SJH-SR-1. In Condition 1, no interruption is required. In Condition 2, only deficit load entities are to interrupt interruptible customers. Utilities that are not in a deficit load condition are not required to interrupt load. Not until a Condition 3 emergency is declared must all load entities begin removing interruptible load. And not until a Condition 4 emergency is declared must all interruptible load be interrupted. During 1998, which was one of the hottest summers on record, ERCOT declared only one Condition 2 emergency, for 2 hours and 55 minutes. Id., Exh. SJH-SR-2. Interruptible customers receive a credit not because they are actually interrupted, but because they can be interrupted.

Nucor's proposed changes would turn Rate GTUC into an interruptible TOU rate. The non-emergency curtailment provisions will be limited and resemble the buy-through option in the noticed interruptible rate. Customers would receive the full rate credit even though they would experience little if any "emergency" curtailment. Further, the emergency curtailment period price would be at a rate that is so high that it would make the curtailment essentially obligatory. Indeed, Nucor admits this on page 30, where it states that Dr. Zarnikau's proposed $3.50/kWh emergency curtailment charge is not intended to gauge whether ERCOT prices are the same as prices elsewhere in the country -- although that was the only rationale presented by Dr. Zarnikau in his testimony as to how he determined that $3.50/kWh was appropriate [Nucor Exh. 3 (Zarnikau), p. 35] -- but is designed "to secure performance from curtailable customers during Emergency situations that justifies granting them the equivalent of the noticed interruptible discount...."13 In other words, Nucor is trying to make sure the price is so high that what is labeled as "firm" service in the tariff will turn out to be noticed interruptible service in practice.14 The end result of Nucor's changes will be that the response of Rate GTUC customers will mimic that of the customers on the current noticed interruptible rate, and Nucor will have achieved one of its goals in this proceeding -- a noticed interruptible TOU rate with an unwarranted price discount. If Nucor's proposals for Rate GTUC are adopted, the rate would be a far cry from a firm service rate with a voluntary curtailment option, as TU Electric has proposed and as the Signatories have recommended be approved by the Commission.

Nucor also claims on page 29 that its proposal "assures revenue neutrality." Nucor is wrong, because it has no idea as to what the average interruption period on TU Electric's system has been. In supporting its proposed changes to Rate GTUC, Nucor suggests that emergency curtailment periods are likely to average 15 to 20 hours per year. Nucor Exh. 3 (Zarnikau), p. 58. However, Nucor presents no historical data to support this conclusion. Considering that Nucor is both a noticed interruptible and instantaneous interruptible customer, Nucor certainly has access to this information. But Nucor did not present it, and Dr. Zarnikau was completely unfamiliar with this information. Tr., pp. 195-97. Yet, Dr. Zarnikau was somehow able to testify not only that 15 to 20 hours per year was reasonable, but that if a customer chose to take service during the emergency curtailment periods, the customer would end up paying for firm service. Nucor Exh. 3 (Zarnikau), p. 61. How Dr. Zarnikau was able to determine this would be the case without having any knowledge concerning actual historical interruption periods on the TU Electric system is most incredible. Of course, his total lack of knowledge as to average interruption periods does explain why Dr. Zarnikau failed to provide any numerical analysis that would support his claims that his modified Rate GTUC would be revenue neutral, and that a customer taking service during all curtailment periods would end up paying the equivalent of firm rates. Quite simply, Dr. Zarnikau does not know what the average interruption period has been on TU Electric's system in the past, and any testimony as to what it may be in the future is no more than pure speculation, which is hardly sufficient to support his proposed changes to Rate GTUC.

Further, even using Nucor's own curtailment figures, revenue neutrality would not occur. As calculated above, under Nucor's proposed Rate GTU-NI, a 1 kW customer taking power during all hours of the year would pay $118.11 in energy charges. If that customer took service during 20 hours of emergency curtailment periods, the additional cost would be $70.00. Dr. Zarnikau limits non-emergency curtailments to 35 hours, at 25¢/kWh, for a maximum additional cost of $8.75. Thus, assuming 20 hours of emergency curtailment periods, the maximum cost would be $196.86. However, calculating what the same customer would pay under Rate GTU produces a figure of $215.06.15 The Rate GTU-NI customer would therefore save $18.20, or about 8.5%, as compared to taking service under Rate GTU. Thus, not only does Dr. Zarnikau not have any knowledge as to what actual curtailments have taken place in the past, but using his own assumptions shows that his proposed Rate GTU-NI is not revenue neutral.

IV. CONCLUSION AND PRAYER

The proposed TOU rates contained in the Stipulation are just, reasonable, and otherwise fully in compliance with PURA. They should be approved, and the Commission should enter an Order consistent with the Stipulation as set out in Attachment A to TU Electric's Brief. Nucor's proposed changes to Rate GTUC are unnecessary and unreasonable, and are designed to do nothing more than inappropriately turn Rate GTUC into a low-priced interruptible TOU rate. Nucor's claims of undue discrimination are also without merit. As such, there is no need to even consider the merits of Nucor's proposed interruptible TOU rates. However, if those interruptible TOU rates are considered, they are based upon incorrect rationales and false assumptions, are underpriced, are not revenue neutral, and should be rejected.

WHEREFORE, TU Electric prays that Rates RTU-1, GTU, and GTUC proposed in the Stipulation be adopted; that the Commission enter an Order consistent with the Stipulation, as set out in Attachment A to TU Electric's Brief; that TU Electric be granted such further relief to which it is justly entitled; and that all requests for relief made by Nucor be denied in their entirety.

Respectfully submitted,

WORSHAM, FORSYTHE &

WOOLDRIDGE, L.L.P.

J. Dan Bohannan

State Bar No. 02563000

Wm. Stephen Boyd

State Bar No. 02780500

1601 Bryan Street, 30th Floor

Dallas, Texas 75201

(214) 979-3000

By:

J. Dan Bohannan

ATTORNEYS FOR TEXAS UTILITIES

ELECTRIC COMPANY

CERTIFICATE OF SERVICE

It is hereby certified that a copy of the foregoing was delivered to the Office of General Counsel and all other parties of record by hand delivery or facsimile transmission, on this the 25th of January, 1999.

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