Minnesota Public Utilities Commission Staff Briefing Papers

Transcription

1 Minnesota Public Utilities Commission Staff Briefing Papers Meeting Date: October 10, *Agenda Item # 1 Companies: Docket No. Northern States Power Company (Xcel Energy) E002/M In the Matter of the Petition of Northern States Power Company for approval of an amendment to the Laurentian Energy Authority I, LLC Power Purchase Agreement Issue: Should the Commission approve the Second Amendment to the Second Amended and Restated Biomass Power Purchase Agreement between Xcel Energy and the Laurentian Energy Authority, LLC? Staff: Marc Fournier Michelle Rebholz Relevant Documents Xcel Energy Petition for Approval of an Amendment to a Power Purchase Agreement with Laurentian Energy authority I, LLC... July 26, 2013 Comments of the Minnesota Department of Commerce Division of Energy Resources... September 10, 2013 Reply Comments of Xcel Energy.... September 20, 2013 Reply Comments of Laurentian Energy Authority (LEA).... September 20, 2013 Reply Comments of the Minnesota Department of Commerce Division of Energy Resources... September 30, 2013

2 The attached materials are workpapers of the Commission Staff. They are intended for use by the Public Utilities Commission and are based upon information already in the record unless noted otherwise. This document can be made available in alternative formats (i.e., large print or audio) by calling (voice). Persons with hearing loss or speech disabilities may call us through their preferred Telecommunications Relay Service..

3 Staff Briefing Papers for E002/M on October 10, 2013 Page 3 Background On December 30, 1998, Xcel entered into a PPA with EPS/Beck Power, LLC for the construction and operation of a 25 MW whole tree closed-loop biomass plant in the St. Peter, Minnesota area as part of its actions to meet the biomass mandate under Minn. Stat. 216B The Commission approved the Agreement in a January 11, 2000 Order in Docket E-002/M In a September 11, 2000, Order, the Commission approved the First Amendment to the Original PPA, which, in part, increased the facility size to 50 MW. EPS/Beck subsequently transferred the contract to the NGP Power Corporation ( NGP Power ). NGP Power then assigned its interest in the project to NGPP Minnesota Biomass, LLC ( NGPP ), a wholly owned subsidiary of NGP Power. On May 30, 2003, subdivision 5a of Minn. Stat. 216B.2424, became effective. This subdivision required the Commission to approve the NGPP Project: [I]f the developer of the Project agrees to reduce the size of the Project from 50 megawatts to 35 megawatts, while maintaining a price for energy at or below the current contract price. On January 16, 2004, Xcel filed a petition with the Commission requesting approval of an amended and restated biomass PPA that 1) incorporated the statutory reduction in project size, 2) recognized relocation of the biomass project to northern Minnesota, and 3) provided an improved pricing structure for project energy. On March 22, 2005, Xcel filed for approval of the Second Amended and Restated Biomass Power Purchase Agreement with Laurentian, as successor to NGPP. On August 10, 2005, the Commission issued an Order in Docket E002/M approving the Second Amended and Restated Biomass Power Purchase Agreement. The Second Amended PPA: Is for 35 MW of biomass capacity. Has an average price of $102.85/ MWh over its term. Changes ownership of the PPA to Laurentian Energy Authority, LLC, a joint venture company created and owned by the Hibbing Public Utilities Commission and Virginia Public Utilities Commission ( the Cities ) Minnesota Session Laws, Chapter 110, Section 22 further modified Minn. Stat. 216B.2424, subdivision 5a to, among other things: Require a public utility to, upon request by the project owner, amend the power

4 Staff Briefing Papers for E002/M on October 10, 2013 Page 4 purchase agreement described in paragraph (b) of the section, and approved by the commission as required by paragraph (c) of Minn. Stat. 216B.2424, subdivision 5a. Require that the amendment be negotiated and executed within 45 days of the effective date of the new law and apply to prices paid after January 1, Limit the average price for energy in nominal dollars over the term of the power purchase agreement to no more than five percent above $104 per megawatt hour. Require the Commission to act on the amendment within 90 days of submission of the request by the public utility. On July 31, 2009, Xcel filed a petition for approval of an amendment to the Second Amended and Restated Biomass PPA (the 2009 Amendment). The petition sought an increase in the price of the PPA. On November 10, 2009, the Commission issued an Order Approving the Amendment With Conditions in Docket E-002/M Minnesota Session Laws, Chapter 57 further modified Minn. Stat. 216B.2424, subdivision 5a to: Limit the average price for energy in nominal dollars over the term of the power purchase agreement to no more than $ per megawatt hour. Require the public utility to agree upon request of the project owner to amend the power purchase agreement to include a fuel cost adjustment clause which requires the public utility to reimburse the project owner monthly for all costs incurred by the project owner during the applicable month to procure and transport all fuel used to produce energy for delivery to the public utility pursuant to the power purchase agreement to the extent such costs do not exceed $3.40 per million British thermal unit. Require Xcel, beginning retroactively in 2012, to pay for all energy delivered by the project owner provided that the project owner does not deliver more than 110 percent of the amount scheduled for delivery in any year of the power purchase agreement, and does not deliver, on average over any five consecutive years of the power purchase agreement, and amount greater than 105 percent of the amount scheduled for delivery over the five year period 1 1 The complete version of the above referenced statute is attached to this briefing document.

5 Staff Briefing Papers for E002/M on October 10, 2013 Page 5 On July 26, 2013, Xcel filed a petition in the instant docket requesting that the Commission approve an amendment to the Second Amended and Restated Biomass Power Purchase Agreement between Xcel and Laurentian. On September 10, 2013, the DOC filed comments raising a number of concerns and recommending approval only if specific conditions are included. On September 20, 2013, Xcel and Laurentian Energy Authority (LEA) each filed reply comments objecting to the price conditions recommended by the DOC. On September 30, 2013, the DOC filed reply comments responding to Xcel and LEA reply comments. Statement of the Issue Should the Commission approve the Second Amendment to the Second Amended and Restated Biomass Power Purchase Agreement between Xcel Energy and the Laurentian Energy Authority, LLC? Xcel Petition: The Laurentian Project The cities of Hibbing and Virginia, Minnesota (the City Utilities) each own and operate municipal coal-fired generating stations that have been refurbished to also burn biomass fuels. The plants provide thermal energy for district heating and cooling to businesses and residents of the cities, and related electricity. The Hibbing plant delivers approximately 20 MW of biomass Capacity and Energy to NSP under the PPA, and the Virginia plant delivers approximately 15 MW of biomass Capacity and Energy to NSP under the PPA. Each city is electrically interconnected to a substation, and then to a Minnesota Power transmission line. Energy is delivered to Xcel Energy in accordance with the MISO open access transmission tariff (OATT). The two retrofitted plants began commercial operation in January A common site for quality control of fuel has been developed between the two City Utilities where the fuel is processed prior to delivery to the boiler sites. Fuel usage consists of closed-loop biomass, open-loop biomass and coal. The closed-loop fuel supply consists of trees and shrubs grown specifically for harvesting and use at the plant. The open-loop fuel supply consists of wood waste and tree trimmings and other clean wood waste derived from sources in close proximity to the plant. Amended PPA Terms The proposed PPA amendment includes the following modifications to the agreement: Effective January 1, 2014, Xcel Energy will purchase the output from the project over

6 Staff Briefing Papers for E002/M on October 10, 2013 Page 6 the remaining term of the agreement at a modified price as specified in the PPA. The new PPA rates result in an average price of $ over the term of the PPA, consistent with the 2013 amendment to paragraph (e) of the Biomass Statute. Consistent with the new paragraph (f) of the Biomass statute, the fuel cost adjustment is addressed in 5.0 of the PPA amendment. Section 5.0 of the PPA amendment states that beginning in 2014, costs incurred to procure and transport fuel used to generate power purchased by Xcel is subject to recovery by LEA if such costs exceed $3.40 per MMBTU. Consistent with new paragraph (g) of the Biomass Statute, Section 4.0 of the PPA amendment also addresses payments delivered under the PPA. Section 4.0 states that beginning in 2012, and over the remaining term of the contract, Xcel shall purchase all net actual delivered by the project, subject to thresholds based on committed energy production. Once the Commission has approved the PPA amendment, the Company indicated that it will pay the invoices to account for the 2012 net actual generation in excess of the committed energy production for which the Company had not paid the full energy price. The new statute and proposed amendment effectively require payment for the actual 2012 production at the full energy price. These expenditures as well as all payments to Laurentian under the PPA will be collected from Xcel Energy customers through the fuel clause adjustment, as allowed by the Commission. At the committed energy production levels specified in the PPA, payments for Xcel to LEA will increase. The projected increase only considers the impact of the new pricing for committed energy production and does not include a projection of additional payments for net actual generation (subject to defined thresholds) in excess of committed energy production or the fuel cost adjustment. DOC: The Department concludes that to the extent the proposed Amended PPA strictly conforms to the revised statute, the Commission must approve it. To the extent that the revisions to the Biomass Statute allow for discretion, the Commission can and should determine whether the Amended PPA is in the public interest. As in past biomass PPA determinations, such a provision can be considered in the public interest if and only if the financial and business risks are reasonably allocated between the utility and the utility s ratepayers and the proposed price is reasonable given the current version of the Biomass Statute and any other relevant factors. Public Interest Price The DOC pointed out that the statute states that the average price for energy in nominal dollars measured over the term of the power purchase agreement must not exceed $ per megawatt hour. Xcel has not shown that it is reasonable to require ratepayers to pay the maximum price rather than a price below $ per MWh. This question is important to assess the

7 Staff Briefing Papers for E002/M on October 10, 2013 Page 7 reasonableness of the price because the Laurentian PPA is not a result of a competitive bidding process. Instead, it was borne out of the biomass mandate, Minn. Stat. 216B.2424, as discussed above. Therefore, one of the main advantages for ratepayers of a contract with an independent power producer versus a facility built by the utility, i.e., a competitive price, has been already eliminated. A second significant advantage of an ordinary PPA is that the risk to ratepayers of having to pay for uncertain costs of producing electricity is eliminated when there is a fixed price over the life of the contract. However, the frequent changes in the price of the PPA between Laurentian and Xcel have eroded that advantage to ratepayers. This is the second time Xcel has requested that the price be raised. Xcel first requested the Commission to approve a higher price in 2009 in Docket No. E002/M This request was approved by the Commission in its November 2009 Order. Allowing a second increase in the PPA price to the maximum price allowed in the statute, with no explanation for this proposal, inappropriately shifts the operational risks to Xcel s ratepayers, thus eliminating one of the main premises underlying the Commission s previous approval of the PPA. While it is clear that the biomass statute was revised as indicated above, Xcel made no attempt to explain why ratepayers should pay the maximum price. Thus, Xcel s request to amend the PPA as proposed is very concerning. This concern is all the more important since allowing Laurentian to recover part of its fuel costs from Xcel s ratepayers further violates the principle that a PPA must represent an agreed upon fixed price which incorporates all the financial and operational risks of the Independent Power Producer (Laurentian). DOC Analysis of Proposed Amendments With respect to price, the DOC pointed out that Minn. Stat. 216B.2424 requires Xcel to negotiate an amended price, not to exceed an average price, over the life of the contract, of $ per MWh. The average price in the currently approved PPA is $104 per MWh. Any negotiated price at or below $ per MWh would meet the requirements of the amended Biomass Statute. Xcel has not shown that its proposed average price increase to $ per MW is reasonable. For example, the trend in the proposed price is inconsistent with the trend in the incremental cost of electricity for Northern States Power Company (NSP). Specifically the average Locational Marginal Prices (LMP) at the Minnesota hub for the period May 2008 April 2009, May 2009 April 2010 and 2012 were $36.64 per MWh, $24.59 per MWh, and an average of $25.99 per MWh (DOC Attachment No. 2). The trend in these prices does not support an increase in the price of the Laurentian PPA. The comparison to the LMP pertains only to energy costs, not to capacity costs, so to provide a more complete comparison, it is helpful to compare the proposed price to a price that encompasses capacity costs as well. Laurentian is owned by the municipalities of Hibbing and Virginia and both of these cities have municipal utilities which buy electricity from Minnesota Power at a wholesale rate and then sell the purchased electricity to their residents at a retail rate. The rates that Hibbing and Virginia charge to their customers include energy costs, capacity costs, distribution costs and

8 Staff Briefing Papers for E002/M on October 10, 2013 Page 8 customer costs. Thus, it should be expected that the proposed price in the Laurentian PPA would be lower than the rates that these cities charge their customers. The municipal utility of Virginia charges its residential customers $0.077 per kwh or $77 per MWh. However, this rate is $32.20 per MWh lower than the proposed price of the Laurentian PPA. The municipal utility of Hibbing charges its residential customers $91 per MWh which is $18.2 lower per MWh than the price charged by Laurentian to Xcel. Therefore, the Department concludes that Xcel has not shown that it is reasonable to charge its ratepayers the maximum price for the PPA. Thus, the average price of $ is excessive, and therefore, not reasonable. Committed Energy Production (CEP) Under the existing PPA, Xcel is not obligated to purchase energy exceeding the annual CEP of 264,600 MWh in any year of the contract. Under the Amended PPA, Xcel would be obligated to buy all energy delivered up to 110 percent of the CEP in any year of the contract provided that for any five consecutive years the average does not exceed 105 percent of the CEP. This provision is included in Subd. 5a, part (g) of the amended Minn. Stat. 216B Section 2, Part c and Section 4.0 of the Amended PPA simply incorporates the requirements in Subd. 5a, part (g) of the amended Minn. Stat. 216B The Department observes that as a result of this provision, Xcel s ratepayers are required to pay a premium price for energy in excess of the CEP. The Department also notes that the above provision applies to the years 2012 and 2013 as well as on a going-forward basis, as stated in part (g) of the amended Minn. Stat. 216B.2424 and Section 4.0 of the Amended PPA. Fuel Cost Provisions Subd. 5a, section (f) of the amended Minn. Stat. 216B.2424 requires Xcel, beginning in 2014, to pay Laurentian for any fuel costs in excess of $3.40 per MMBTU. This provision of the statute is accommodated in Section 5.0 of the Amended PPA. The Department believes that this provision shifts the fuel cost risk away from Laurentian to Xcel s ratepayers. As such, it contradicts a basic premise of PPAs that a fixed price PPA should incorporate all fixed and variable costs associated with the Project, including all fuel costs. In addition, Xcel provides no provision in the PPA as to how Xcel will verify that the fuel costs charged under the PPA are accurate or reasonable. For example, there is no provision for Xcel to examine or audit the fuel costs charged under the PPA. Without such examination, Xcel has no way to certify that the fuel costs that Xcel would presumably propose to charge its ratepayers are reasonable. The Department acknowledges that the fuel cost provision is required by the amended Minn. Stat. 216B However, since the Commission must still ensure that rates are reasonable as required under Minn. Stat. 216B.03, and since Xcel bears the burden of proof as required under Minn. Stat. 216B.16 to show that any rates it proposes to charge to its ratepayers are reasonable, the Commission should require Xcel to show that any proposal to recover fuel costs from its ratepayers in excess of $3.40 per MMBTU is reasonable by providing documentation of the costs and by verification by Xcel of the costs.

9 Staff Briefing Papers for E002/M on October 10, 2013 Page 9 Emission Issues The DOC indicated that based on information provided by Xcel that emissions per MWH are much higher for Laurentian than for the natural gas fueled High Bridge plant. The DOC indicated that it is concerned that the Laurentian Project fails to meet one of the main goals of renewable energy. Conclusions and Recommendations Based on its review and analysis of Xcel s Petition, the DOC concludes that the amended PPA between Laurentian and Xcel, as proposed, is not in the public interest because: 1. Xcel has not shown that it is reasonable to charge its ratepayers for the highest price allowed by law. 2. Xcel has no provision in the PPA to ensure that any proposal in practice to charge for fuel costs above $3.40 per MMBTU is documented and verified, let alone reasonable. Based on its review and analysis of Xcel s petition and based on its general conclusions and its specific conclusion that the price of $ is excessive and is not required by the amended Minn. Stat. 216B.2424, the Department recommends that the Commission approve the Amended PPA, modified as follows: Xcel: 1. retaining the $104 price contained in the currently approved PPA unless and until Xcel can show why it is reasonable to charge ratepayers a higher price, and 2 2. including a provision to show that any specific proposal in practice to charge for fuel costs higher than $3.40 per MMBTU is fully documented and verified. The amended PPA includes a change to the contract price from an average of $ to $ per MWh. The Department recommended approval of the Amended PPA, but with a modification to set the price at an average of $104 per MWh. The Company believes the average price of $ in the Amended PPA is consistent with the intent of new legislation and the history of how this contract has been changed in the past to incorporate previous legislation related to the contract price. 2 In reply comments, the DOC modified its recommended price to $ The 2009 amended PPA between Laurentian and Xcel included an agreed-upon average price of $ per MWh. The Commission approved the 2009 amendment in its Order Approving Amendment with Conditions dated November 10, 2009.

10 Staff Briefing Papers for E002/M on October 10, 2013 Page 10 When the prior version of this statute was made effective as a result of 2009 legislation, the Company sought an amendment to the PPA to increase the price to an average of $ per MWh. The Commission approved that amendment in its November 10, 2009 Order in Docket No. E002/M The average price of $ was negotiated and implemented when the applicable law stated that the average price must not exceed $104...by more than five percent (or $109.20). The new law states that the average price must not exceed $ Xcel believes the intent of this legislation was to increase the PPA price, which is reflected in the proposed Amended PPA between the parties. Xcel believes that this contract change is in accordance with the legislative intent, and as such, the Company continues to recommend approval of the Amended PPA proposed in our Petition. With respect to the fuel cost provisions, The Department recommended that the Commission approve the Amended PPA, but with a modification to include a provision to show that any specific proposal in practice to charge for fuel costs higher than $3.40 per MMBTU is fully documented and verified. Xcel has no objection to this recommendation. The PPA already provides a Right to Access and Right to Audit. This gives Xcel Energy the ability to fulfill the Department s recommendation to review all documentation related to the fuel cost provision and verify fuel costs in excess of $3.40 per MMBTU. Xcel Energy will perform such an audit and verification for periods where costs exceed $3.40 per MMBTU and will maintain the appropriate documentation related to these costs. LEA: Based on the circumstances of tightening biomass fuel markets, in 2011 LEA approached Xcel about another price adjustment utilizing the remaining price difference between the existing $106.95/MWh average price and $109.20/MWh allowed by the 2009 amendment to the biomass statute. Xcel was unreceptive to any price change. In 2011 and 2012 Xcel adopted various reinterpretations of the Laurentian PPA each which would have reduced the revenue or increased cost to LEA. Numerous discussions and communications about the issues occurred with no resolution. Xcel and LEA negotiated the proposed amendments to the Laurentian PPA which are before the Commission with the understanding that the legislature clearly meant the amendment to fully address the underlying financial concerns of LEA. The issue in this docket is whether the proposed amendments to the Laurentian PPA, are a reasonable means to accomplish the intent of the 2013 amendment. The 2009 legislature previously allowed LEA pricing up to a maximum of five percent above the average of $104/MWh, which is $109.20/MWh. Since 2011, when it began experiencing serious fuel cost increases and related financial pressure, LEA emphasized the Xcel that the average price in the Laurentian PPA needed to be raised to the full $109.20/MWh previously approved by the legislature, to preserve the viability of the LEA plant. After Moody s downgrade in 2012 based in

11 Staff Briefing Papers for E002/M on October 10, 2013 Page 11 large part on these issues, the imperative for a pricing message was delivered to the 2013 legislature. LEA believes that it is clear that a price increase is needed. LEA was downgraded at current prices, and its cost have only increased, casing additional deterioration. In addition to the need to meet its ongoing expenses, including bond payments, the Laurentian PPA requires LEA to meet a financial viability requirement. This test means that LEA must generate sufficient revenue to meet sufficient revenue to meet the obligations of its bonds and to pay all fixed and variable costs of the LEA plant when due. Even the combination of a price increase of a $ average and a new fuel cost recovery mechanism will only move LEA s debt service coverage ratios back to about 1.0. The fuel adjustment threshold of $3.40/MMBTU was set in conjunction with the $ average price, and the combination of the two is necessary to provide the intended financial improvements for the project; failing to implement either or both frustrates that purpose. The inclusion of the fuel cost recovery mechanism may end the cycle of price increases and amendments to the Laurentian PPA. With respect to the Audit and cost verification, LEA indicated that it is already providing Xcel with fuel use and cost data regularly. To the extent that the DOC and Xcel believe that this data is insufficient for purposes of the new fuel cost recovery mechanism, LEA is willing to work with Xcel to improve the reporting details. LEA does not believe that this would require any further amendments to the PPA. DOC Reply Comments: It appears that Laurentian views approval of the PPA as an open-ended process in which the price of the PPA and other terms previously approved by the Commission are not firm but rather are subject to change if the financial projections used by Laurentian are not met. When the Commission approved the PPA between Xcel and Laurentian on August 10, 2005, it found the PPA to be in the public interest based on the specific terms of the PPA; otherwise the Commission may have decided not to approve the PPA. Once again when the Commission approved the amended PPA between Xcel and Laurentian on November 10, 2009 it found the amended PPA to be in the public interest, based on the specific price and terms of the amended PPA. Were the Second Amended 2005 PPA and the 2009 Amendment to include specific contingencies for price change and other possible contractual changes, the Commission would have the opportunity to determine whether or not such contingencies were in the public interest. Every time Laurentian imposes a higher cost on the project, Xcel s ratepayers are burdened with increase. Even Xcel s low-income customers are charged higher rates through the fuel clause adjustment. Treating the PPA as an open-ended process simply renders the Commission s approval process largely meaningless. In such a case all the risks are shifted away from Xcel and Laurentian to Xcel s ratepayers. Xcel s ratepayers should not bear the risk of Laurentian s

12 Staff Briefing Papers for E002/M on October 10, 2013 Page 12 inability to produce a reasonable business plan and execute such a plan prudently. Laurentian argues that at any price lower than $ per MWh, it would likely become financially non-viable; therefore, they conclude that the Department s objection to the price of $ per MWh is ill-founded. Laurentian seems to turn the whole regulatory process upsidedown. The Commission must ensure that the price Xcel s ratepayers pay for utility service is reasonable in order to conclude that the PPA is in the public interest. It is not the responsibility of the Commission to guarantee the financial well-being of Laurentian. Further, Laurentian seems to believe that Xcel s ratepayers should bear the total financial and business risks of the PPA. This approach is counter to any reasonable regulatory policy. Laurentian s business model keeps failing because it is unable to reasonably project the future costs of its plant. Twice in the past, the Commission approved the amendments to PPA between Laurentian and Xcel under the premise that the price of the PPA was a fixed price, and any price (cost) risk was borne by Laurentian. Unfortunately, this basic premise regarding the price risk was not met. If, as argued by Laurentian, the sole purpose of the amended Minn. Stat. 216B.2424 is to protect the financial viability of Laurentian, then the Commission should have no role in the process. Instead, an annual auditing of the financials of Laurentian by the Department should be sufficient. However, the legislators believe otherwise as expressed by the language in the amended Minn. Stat. 216B As previously noted, the amended statute requires that that Commission approve the PPA (which is also required by the PPA itself), but does not mandate a specific price; by contrast it sets a price cap. Based on the above discussion, the Department concludes that, counter to the argument by Laurentian, the Department s objection to the higher price of $ is well-founded. Moreover, Minn. Stat. 216B.2424 must be viewed together with Minn. Stat. 216B.03. As such, the rate charged to Xcel and in turn to Xcel s ratepayers by Laurentian must be just and reasonable. Moreover, any doubt as to reasonableness should be resolved in favor of the consumer. As to reasonableness, it is appropriate to compare the PPA to other alternative energy resources. Based on such a comparison, the Department found the PPA price to be unreasonably high. As to just rate, the Department concluded that Xcel s ratepayers pay Laurentian much higher rates than the owners of Laurentian (Virginia and Hibbing municipalities) charge their own customers. Therefore, there is no basis to conclude that the PPA s proposed rate is just and reasonable. Based on its review and analysis of Xcel s petition and Xcel s and Laurentian s reply comments, and based on its conclusion, the Department recommends that the Commission: 1. approve the Amended PPA with the following modification: substitute the price of $ per MWh for the price of $ per MWh; and 2. require Xcel to perform an audit and maintain documentation for periods where fuel costs exceed $3.40 per MMBtu.

13 Staff Briefing Papers for E002/M on October 10, 2013 Page 13 Staff Analysis One option is to strictly look at the statute in isolation and simply approve the proposed amendment. The statute states that the PPA amendment is to be filed with the Commission and the Commission is to approve the amendment: The amendment shall be negotiated and executed within 45 days of the enactment of this act and shall be effective for fuel costs incurred and prices after January 1, The public utility shall request approval of the amendment by the commission, and the commission shall approve the amendment as reasonable and in the public interest and allow the public utility to recover from its Minnesota retail customers the amounts paid by the public utility to the project owner pursuant to the power purchase agreement during the full term of the power purchase agreement, including the reimbursement of fuel costs pursuant to the power purchase agreement amendment, pursuant to section 216B,1645, or otherwise. Another option is to consider the Department s position and require an adjustment of the PPA price. As the Department observes, the price in the statute is a ceiling, not a floor. The Reply Comments of Laurentian Energy Authority I, LLC, unfortunately, do not resolve the Department s concerns but rather reinforce them. LEA s comments suggest that the only calculation that was made in arriving at the price was revenue certainty for LEA. As such, it would be reasonable for the Commission to find that the Department s position is one that squares more neatly with the Commission s role in setting rates. The Department suggests that to the extent the statute allows for discretion, the Commission can and should determine whether the Amended PPA is in the public interest, which would include a review of the financial and business risks in the PPA. The Commission has addressed its scope of authority in similar circumstances in other dockets. 3 In its November 10, 2009 Order Approving Amendment with Conditions in Docket E-002/M , which deals with a very similar 2009 statutory amendment related to this Laurentian project, the Commission stated: While the Legislature's mandate and framework for biomass-derived electric generation, including the most recent amendment to Minn. Stat. 216B.1645, are indicators that the proposed Amendment is in the public interest, the Legislature has given the Commission the obligation to review proposed biomass PPAs to ensure that they are, in fact, in the public interest. The Commission has conducted such a review and agrees with the Department that the amendment needs additional provisions to be in the public interest. The Commission finds that all of the OES's recommended conditions are reasonable and necessary except the first one and therefore will approve the proposed amendment, as conditioned by the OES's proposed last three provisions. 3 The parties have not raised federal pre-emption or PURPA-related issues that could possibly be implicated by the legislation.

14 Staff Briefing Papers for E002/M on October 10, 2013 Page 14 The Commission will not adopt the OES's first recommended condition, that the Order approving the proposed amendment state that no further price changes will be allowed in the PPA. The OES acknowledged a legitimate question as to whether such a provision would be upheld. Having examined this issue, the Commission concludes that it would not be appropriate for the Commission to attempt to fix the change to the PPA's fuel price requested by Xcel in this matter as the final price change that the Commission will ever approve. Such an undertaking would conflict with the language of recently adopted subsection (e) of Minn. Stat. 216B.1645, Subd. 5a, since that statute does not limit to one the number of fuel price changes to the PPA that the Commission can be requested to approve. Moreover, adoption of a statement that this will be the last change in the PPA's fuel price would be an empty gesture since the Commission clearly does not have the capacity to stay the hand of future Commissions who may be called upon to determine whether future proposed changes of the PPA price (up or down) are in the public interest. Even clearer, the Commission does not have the authority to prevent a future Legislature from adopting additional legislation that would authorize or require additional price changes to this PPA. And in its August 13, 2004 Order Referring Matter for Mediation and Requiring Submission of Any Purchase Power Agreement for Review and Approval relating to the Itasca Power biomass project in Docket No. E-002/CI , the Commission found that ratepayer protection is part of the evaluation process to determine the reasonableness of PPAs. The Commission stated in its Order that: Over the past several years, the Commission has consistently interpreted wind and biomass statutes as implying authority and duty for the Commission to review and approve the PPAs formed as a result of those statutes to assure adequate ratepayer protection. Ratepayer protection is to be evaluated in the context of the particular statutory mandate in question, of course, but remains a significant Commission obligation nevertheless. While the mandatory statutory language in the instant case may affect the Commission s evaluation of what PPA terms are reasonable, it does not relieve the Commission of the obligation to make such an evaluation. The Commission s statement from the above referenced Orders are completely consistent with Minn. Stat. 216B.03 which states the following in part: 216B.03 REASONABLE RATE. Every rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable. Rates shall not be unreasonably preferential, unreasonably prejudicial, or discriminatory, but shall be sufficient, equitable, and consistent in application to a class of consumers. Any doubt as to reasonableness should be resolved in favor of the consumer..

15 Staff Briefing Papers for E002/M on October 10, 2013 Page 15 Commission Options 1. Find that the amendment to the Second Amended and Restated Biomass Power Purchase Agreement between Xcel and Laurentian Energy Authority is not reasonable nor in the public interest as filed. Direct Xcel to file, within 45 days of the date of this order, a modified PPA with an average price for energy no higher than $ in nominal dollars over the term of the PPA. Require Xcel to show that any specific proposal in practice to charge for fuel costs higher than $3.40 per MMBTU is fully documented and verified. 2. Find that the amendment to the Second Amended and Restated Biomass Power Purchase Agreement between Xcel Energy and Laurentian Energy Authority is reasonable and in the public interest and approve Xcel s petition. Require Xcel to show that any specific proposal in practice to charge for fuel costs higher than $3.40 per MMBTU is fully documented and verified. 3. Take other action as the Commission deems appropriate.

16 Staff Briefing Papers for E002/M on October 10, 2013 Page 16 CHAPTER 57--S.F.No. 521 An act relating to energy; regulating a biomass mandate project and a proposed high-voltage transmission line;amending Minnesota Statutes 2012, section 216B.2424, subdivision 5a. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: Section 1. Minnesota Statutes 2012, section 216B.2424, subdivision 5a, is amended to read: Subd. 5a. Reduction of biomass mandate. (a) Notwithstanding subdivision 5, the biomass electric energy mandate must be reduced from 125 megawatts to 110 megawatts. (b) The Public Utilities Commission shall approve a request pending before the commission as of May 15, 2003, for amendments to and assignment of a power purchase agreement with the owner of a facility that uses short-rotation, woody crops as its primary fuel previously approved to satisfy a portion of the biomass mandate if the owner of the project agrees to reduce the size of its project from 50 megawatts to 35 megawatts, while maintaining an average price for energy in nominal dollars measured over the term of the power purchase agreement at or below $104 per megawatt-hour, exclusive of any price adjustments that may take effect subsequent to commission approval of the power purchase agreement, as amended. The commission shall also approve, as necessary, any subsequent assignment or sale of the power purchase agreement or ownership of the project to an entity owned or controlled, directly or indirectly, by two municipal utilities located north of Constitutional Route No. 8, as described in section , which currently own electric and steam generation facilities using coal as a fuel and which propose to retrofit their existing municipal electrical generating facilities to utilize biomass fuels in order to perform the power purchase agreement. (c) If the power purchase agreement described in paragraph (b) is assigned to an entity that is, or becomes, owned or controlled, directly or indirectly, by two municipal entities as described in paragraph (b), and the power purchase agreement meets the price requirements of paragraph (b), the commission shall approve any amendments to the power purchase agreement necessary to reflect the changes in project location and ownership and any other amendments made necessary by those changes. The commission shall also specifically find that: (1) the power purchase agreement complies with and fully satisfies the provisions of this section to the full extent of its 35-megawatt capacity; (2) all costs incurred by the public utility and all amounts to be paid by the public utility to the project owner under the terms of the power purchase agreement are fully recoverable pursuant to section 216B.1645; (3) subject to prudency review by the commission, the public utility may recover from its Minnesota retail customers the Minnesota jurisdictional portion of the amounts that may be incurred and paid by the public utility during the full term of the power purchase agreement; and (4) if the purchase power agreement meets the requirements of this subdivision, it is reasonable and in the public interest. (d) The commission shall specifically approve recovery by the public utility of

17 Staff Briefing Papers for E002/M on October 10, 2013 Page 17 any and all Minnesota jurisdictional costs incurred by the public utility to improve, construct, install, or upgrade transmission, distribution, or other electrical facilities owned by the public utility or other persons in order to permit interconnection of the retrofitted biomass-fueled generating facilities or to obtain transmission service for the energy provided by the facilities to the public utility pursuant to section 216B.1645, and shall disapprove any provision in the power purchase agreement that requires the developer or owner of the project to pay the jurisdictional costs or that permit the public utility to terminate the power purchase agreement as a result of the existence of those costs or the public utility's obligation to pay any or all of those costs. (e) Upon request by the project owner, the public utility shall agree to amend the power purchase agreement described in paragraph (b) and approved by the commission as required by paragraph (c). The amendment must be negotiated and executed within 45 days of May 20, 2009 the effective date of this act, and must apply to prices paid after January 1, The average price for energy in nominal dollars measured over the term of the power purchase agreement must not exceed $104 $ per megawatt hour by more than five percent. The public utility shall request approval of the amendment by the commission within 30 days of execution of the amended power purchase agreement. The amendment is not effective until approval by the commission. The commission shall act on the amendment within 90 days of submission of the request by the public utility. Upon approval of the amended power purchase agreement, the commission shall allow the public utility to recover the costs of the amended power purchase agreement, as provided in section 216B (f) With respect to the power purchase agreement described in paragraph (b), and amended and approved by the commission pursuant to paragraphs (c) and (e), upon request by the project owner, the public utility shall agree to amend the power purchase agreement to include a fuel cost adjustment clause which requires the public utility to reimburse the project owner monthly for all costs incurred by the project owner during the applicable month to procure and transport all fuel used to produce energy for delivery to the public utility pursuant to the power purchase agreement to the extent such costs exceeded $3.40 per million metric British thermal unit (MMBTU), in addition to the price to be paid for the energy produced and delivered by the project owner. Beginning with 2014, at the end of each calendar year of the term of the power purchase agreement, the project owner shall calculate the amount by which actual fuel costs for the year exceeded $3.40 per MMBTU, and prior monthly payment for such fuel costs shall be reconciled against actual fuel costs for the applicable calendar year. If such prior monthly fuel payments for the year in the aggregate exceed the amount due based on the annual calculation, the project owner shall credit the public utility for the excess paid. If the annual calculation of fuel costs due exceeds the prior monthly fuel payments for the year in the aggregate, the project owner shall be entitled to be paid for the deficiency with the next invoice to the public utility. The amendment shall be negotiated and executed within 45 days of the enactment of this act and shall be effective for fuel costs incurred and prices after January 1, The public utility shall request approval of the amendment by the commission, and the commission shall approve the amendment as reasonable and in the public interest and allow the public utility to recover from its Minnesota retail customers the amounts paid by the public utility to the project owner pursuant to the power purchase agreement during the full term of

18 Staff Briefing Papers for E002/M on October 10, 2013 Page 18 the power purchase agreement, including the reimbursement of fuel costs pursuant to the power purchase agreement amendment, pursuant to section 216B.1645, or otherwise. (g) With respect to the power purchase agreement described in paragraph (b) and approved by the commission pursuant to paragraphs (c) and (e), the public utility is prohibited from recovering from the project owner any costs which were not actually and reasonably incurred by the utility, notwithstanding any provision in the power purchase agreement to the contrary. In addition, beginning with 2012, the public utility shall pay for all energy delivered by the project owner pursuant to the power purchase agreement at the full price for such energy in the power purchase agreement approved and amended pursuant to paragraph (e), provided that the project owner does not deliver more than 110 percent of the amount scheduled for delivery in any year of the power purchase agreement, and does not deliver, on average over any five consecutive years of the power purchase agreement, an amount greater than 105 percent of the amount scheduled for delivery over the five-year period. EFFECTIVE DATE.This section is effective the day following final enactment.