STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL BILL SCHUETTE ATTORNEY GENERAL. June 5, 2017

Transcription

1 STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL 0 W. SAGINAW HWY. LANSING, MICHIGAN BILL SCHUETTE ATTORNEY GENERAL June, 0 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 0 W Saginaw Hwy, rd Floor Lansing, MI RE: MPSC No. U-0 In the matter of the application of CONSUMERS ENERGY COMPANY for a financing order approving the securitization of qualified costs and related approvals. Dear Ms. Kale: Enclosed for electronic filing in the above-captioned case please find the revised testimony of Cathy Cole. The only change in the attached testimony was the change from $ Million to $ Million on page, line. Very truly yours, LDD/ccs Att. c: Parties of Record U0 Kale Ltr Lauren D. Donofrio Assistant Attorney General Public Service Division Telephone: () -0

2 S T A T E OF M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * In the matter of the application of ) Consumers Energy Company for a ) financing order approving the securitization ) Case No. U-0 of qualified costs and related approvals. ) ) QUALIFICATIONS AND REVISED DIRECT TESTIMONY OF CATHERINE E. COLE MICHIGAN PUBLIC SERVICE COMMISSION May, 0

3 QUALIFICATIONS OF CATHERINE E. COLE PART I 0 0 Q. Would you please state your name and business address for the record? A. My name is Catherine E. Cole. My business address is 0 West Saginaw Highway, Lansing, Michigan. Q. By whom are you employed and what is your position? A. I am employed by the Michigan Public Service Commission (MPSC or Commission) as the Manager of the Resource Adequacy and Retail Choice Section in the Financial Analysis and Audit Division. Q. Would you please outline your educational background? A. I earned a Bachelor of Science Degree in Mechanical Engineering from Michigan Technological University in, and I earned a Masters of Business Administration Degree from the University of Wisconsin Milwaukee in 000. Since joining the MPSC Staff in 00, I have also attended several training programs sponsored by the National Association of Regulatory Utility Commissioners and Michigan State University including the annual regulatory studies program (August 00), the advanced regulatory studies program (October 00), grid school (March 00), and forecasting for regulators (July 00). Q. Would you please outline your professional background? A. In November, I joined Lobdell-Emery Manufacturing Company, an automotive supplier located in Alma, Michigan, as a Tooling Engineer and worked in the areas of prototype development and sales until July of. In, I joined A. O. Smith Automotive Products Company, an automotive supplier in Milwaukee, Wisconsin as a Product Development Engineer. In,

4 QUALIFICATIONS OF CATHERINE E. COLE PART I 0 0 A. O. Smith Automotive Products Company was purchased by Tower Automotive, based in Novi, Michigan. In, I was promoted to the position of Product Design Leader at Tower Automotive and later relocated to Novi, Michigan. As a Product Design Leader, I was responsible for all aspects of initial product design including oversight of computer aided design models, detailed product drawings, finite element models, prototype development, lab testing, and product changes post production launch for automotive chassis and suspension assemblies for original equipment manufacturers. In November 00, I left Tower Automotive and joined Jackson National Life Insurance as a Programmer in the Information Technology department. Shortly thereafter, I left Jackson and joined the MPSC as a Public Utilities Engineer in July 00. Since joining the MPSC, my assignments have included investigations of distribution reliability, increasing the use of underground distribution lines, reviewing supply adequacy plans, evaluating electric generation alternatives analyses, working on electric transmission siting cases, renewable energy plan cases, renewable energy reconciliation cases, depreciation cases, a gas rate case and an asset transfer case. In 00, I participated in the development of the MPSC s st Century Energy Plan. In 00, I served as the vice chair of the Midcontinent Independent System Operator (MISO) Supply Adequacy Working Group. In 00 and 00, I co-chaired two workgroups of the Michigan Planning Consortium, which were focused on transmission planning in Michigan. Also, in 00, I served on the technical review committee for the Eastern Wind Integration and Transmission Study sponsored by the National Renewable Energy

5 QUALIFICATIONS OF CATHERINE E. COLE PART I 0 Laboratory. In 0, I was promoted to the position of Public Utilities Engineering Specialist focusing on electric transmission and wind integration issues. From 0 through 0, I served as the Executive Advisor to Commissioner John D. Quackenbush. In September 0, I started in my current role as the Manager of the Resource Adequacy and Retail Choice Section. Q. Have you previously filed testimony in cases before the Commission? A. Yes. I filed direct testimony in the following cases: Case No. Case Description U-00 ITC expedited siting certificate for a transmission line U- Consumers Energy depreciation rates for wind plant U- Indiana Michigan 0 renewable energy plan U- DTE Electric 0 renewable energy plan U- DTE Electric 00 renewable cost reconciliation U- DTE Gas rate case U-0 WEPCo, WPSC, and UMERC asset transfer case

6 Q. What is the purpose of your testimony? A. The purpose of my testimony is to outline Staff s position and recommendations regarding the approval of qualified costs as presented by Consumers Energy Company (Consumers Energy or Company) and possible alternatives for the Commission s consideration. Q. Are you sponsoring any exhibits in this proceeding? A. Yes. Exhibit S-.0 Description MSPC Case No. U-, Testimony of David F. Ronk 0 S-. MPSC Case No. U-, Testimony of Angela P. Wojtowicz S-. MPSC Case No. U-, Consumers Energy s Motion to Compel S-. Consumers Energy s response to 0-ST-CE- 0 S-. S-. S-. S-. S-. S-. S-.0 S-. MPSC Case No. U-, Testimony of David F. Ronk MSPC Case No. U-, Affidavit of David F. Ronk NPV Analysis accounting for 0 ROA Risk Consumers Energy s response to 0-ST-CE- and 0-ST-CE- Consumers Energy s response to 0-ST-CE-0 Entergy s response to 0-ST-EN- through 0-ST-EN- Consumers Energy s response to 0-ST-CE- Consumers Energy s response to 0-ST-CE- Q. Were the exhibits prepared by you or under your direction?

7 0 0 A. Exhibits S-. was prepared by me, however, the remaining exhibits were not as they are either discovery responses or witness testimony filed in other dockets. Q. Does Staff recommend approval of regulatory asset treatment for the proposed $ million buyout of the Palisades Nuclear Power Plant Power Purchase Agreement (Palisades Contract)? A. No. Q. Why does Staff not recommend approval of regulatory asset treatment for the $ million buyout of the Palisades Contract? A. Staff recommends that the Commission should not approve regulatory asset treatment for the $ million early buyout of the Palisades Contract because the Company s analysis of the early buyout and capacity replacement plan is deficient for the following reasons:. The Company s plan and analysis do not take into account the significant risk of potential increased capacity obligations beginning in 0 associated with the newly enacted legislation requiring a state reliability mechanism (SRM). The early buyout of the Palisades Contract reduces the tools that the Company will have in its toolbox to meet any potential increased capacity obligations in 0, and. The Company does not provide an analysis of any alternative capacity replacement plan, particularly one that avoids the early buyout payment and implements replacement capacity in 0. The deficiencies in the Company s analysis make it difficult, if not impossible, to make an informed decision regarding the reasonableness and prudence of the

8 0 0 early buyout payment. As such, the Company has not adequately supported its request for regulatory asset treatment of the buyout payment. Company Filing Ignores SRM Risk Q. Has a SRM been implemented in Consumers Energy s service territory or elsewhere in Michigan? A. No, however there are open dockets with applications to implement a SRM in Consumers Energy s service territory in Case No. U- and DTE Electric s service territory in Case No. U-. The Commission opened both dockets on January 0, 0 on the Commission s own motion, and the utilities filed applications in both dockets on April, 0. Both cases are expected to be completed prior to December, 0. The direct testimony of Company witness David F. Ronk in U- is included in this docket as Staff Exhibit S-.0 and the direct testimony of DTE Electric witness Angela P. Wojtowicz in U- is included in this docket as Staff Exhibit S-.. Q. What is the SRM? A. Provisions for setting a SRM are included in Public Act of 0 (PA ) Section w that was signed by Governor Snyder on December, 0 and became effective on April 0, 0. Specifically, PA Section w() states, If, by September 0, 0, the Federal Energy Regulatory Commission does not put into effect a resource adequacy tariff that includes a capacity forward auction or a prevailing state compensation mechanism, then the commission shall establish a state reliability mechanism under subsection (). From a high level, a SRM would require forward capacity demonstrations from load-serving entities

9 0 0 and also provides a methodology for a capacity charge to be calculated that would be paid to the incumbent utility by the customers of an alternative electric supplier for the utility to assume the capacity obligations for those customers if their alternative electric supplier could not adequately demonstrate enough forward capacity to meet its obligations. Effectively, the SRM assigns the incumbent utility responsibility akin to the provider of last resort for capacity obligations for alternative electric supplier load in its territory. Q. How does Consumers Energy characterize the SRM in U-? A. The Company acknowledges that it may be required to provide additional capacity as the result of a SRM. Company witness David F. Ronk explained the SRM as follows: Act provides that the SRM will be a mechanism used to: () set a capacity charge for utility-provided capacity; () require all electric providers, including Alternative Electric Suppliers ( AESs ) to demonstrate that they have sufficient capacity to meet their retail load obligations on a four-year forward basis; and () require retail customers of AESs that do not demonstrate sufficient capacity to be required to pay the SRM capacity charge to the incumbent utility. [Staff Exhibit S-.0, Direct Testimony of David F. Ronk, Jr., p.] Ronk also concluded that under PA the incumbent utilities become required to provide capacity for the load of ROA customers which is not satisfied by their AESs through their required forward resource adequacy demonstrations. (Staff Exhibit S-.0, p (emphasis added.) Q. Please describe the current amount of alternative electric supplier load in the Consumers Energy service territory.

10 0 A. As reported in the MPSC Status of Electric Competition report for the calendar year 0, Consumers Energy reported that MW of alternative electric supplier load existed in the Consumers Energy service territory. The report indicates that Consumers Energy s choice program is fully subscribed with over,000 customers participating for 0.% participation at the end of 0, with over,000 customers waiting in the queue. Q. If Consumers Energy was assigned the forward capacity obligations for all MW of alternative electric supplier load, what would that additional capacity obligation be for Consumers Energy for the 0/0 planning year? A. Midcontinent Independent System Operator (MISO) calculated a planning reserve margin on an unforced capacity basis (PRM UCAP) of.% for the 0/0 planning year in its Planning Year 0-0 Loss of Load Expectation Study Report. If the same PRM UCAP of.% is assumed for planning year 0/0, it is possible that Consumers Energy could be assigned additional capacity obligations of up to 0 zonal resource credits (ZRCs) with an effective date as early as June, 0. Q. Does the Company acknowledge that it may be assigned additional capacity obligations as the result of a SRM and that it should be considering plans or possibly contingency plans in order to meet those potential obligations in 0? Michigan Public Service Commission, Status of Electric Competition in Michigan Report for the Calendar year 0, < Appendix, Chart (accessed May, 0). MISO, Planning Year 0-0 Loss of Load Expectation Study Report, < p, (accessed May, 0).

11 0 0 A. Yes. As I have previously stated, this is acknowledged by Company witness Ronk in his pre-filed Direct Testimony filed in U-, and included as Staff Exhibit S-.0. The Company also recently acknowledged this in a filing made in U- indicating that the annual AES resource adequacy demonstration requirements of PA will significantly affect the retail load for which the incumbent utility must plan to serve with generation capacity resources. The Company stated the annual AES resource adequacy demonstration requirements of Act will significantly impact the retail load for which the incumbent utility must plan to serve with generation capacity resources. [Staff Exhibit S-., U- Motion to Compel filed by Consumers Energy, p (emphasis added).] Q. Was the Company asked to provide plans to acquire any additional capacity for the summer of 0 for Retail Open Access (ROA) load that may be subject to a SRM in Consumers Energy s service territory? A. Yes. The response to discovery request 0-ST-CE- is shown as Staff Exhibit S-.. In this response, Company witness Richard T. Blumenstock responded that the Company will pursue the best feasible option but not until after the AES capacity demonstrations have been made on February, 0. Mr. Blumenstock continued, Therefore, Consumers Energy will not yet know how much AES retail load the Company will need to provide capacity for, which could be as soon as June, 0. Q. Is it true that the Company has stated that it does not intend to make plans to serve any potential increased SRM capacity obligations until there will be less than four months to secure and provide such capacity?

12 0 0 A. Yes. Q. Does Staff agree that the Company does not currently know how much additional capacity obligations it will face starting June, 0 as the result of the implementation of a SRM? A. Yes. Q. Does Staff agree that the Company does not currently know how much additional capacity obligations it may face starting June, 0 as the result of the implementation of a SRM? A. No. Staff believes that the Company does currently know how much additional capacity obligations it may face starting June, 0 as the result of the implementation of a SRM. It could be that the Company will be assigned an additional amount of capacity obligations to cover the entire AES load in its service territory. Q. In Staff s opinion, how should the Company treat the risk of potential additional capacity obligations as the result of a SRM when making resource planning decisions? A. Specific, known quantifiable risks, such as the potential increase in capacity obligations of up to 0 ZRCs as early as 0 occurring as the result of the implementation of a SRM in its service territory should be taken into consideration when making planning decisions affecting the amount of resources that would be available to the Company during that same time period. At a minimum, the Company should be required to quantify the potential and/or expected risk of additional capacity obligations in 0 as the result of a SRM, 0

13 0 0 including the plan to serve, and the estimated cost to serve the potential and/or expected additional obligations in 0. Q. Has the Company included any risk of potential additional capacity obligations as the result of a SRM in the analysis presented to support the request for approval of a regulatory asset in the amount of $ million for the early buyout of the Palisades Contract? A. Staff is of the opinion that the Company has not considered this risk in its analysis. The Company has not included this potential risk in the estimate of costs for the early buyout of the Palisades Contract. For example, in Company witness Thomas P. Clark s Exhibit A- which provides the company estimate of resources needed to replace the Palisades Contract there is no scenario, analysis, or contingency plan explaining how it would be prepared to serve ROA capacity obligations, should they be assigned to the Company, as early as June, 0. Specifically, note the ROA load on line at 0 MW. The ROA load is subtracted from the system peak load on line to obtain the non-coincident full service peak load on line. The planning reserve margin requirement (PRMR) on line and the surplus (shortfall) on line are based upon the non-coincident full service peak load and does not include any ROA load. The revised capacity plan PRMR on line and the surplus (shortfall) on line also do not include any potential future assignments of ROA capacity obligations. In its direct case, the Company does not include any scenario, analysis, or contingency plan explaining how it would be prepared to serve ROA capacity obligations, should they be assigned to the Company, as early as June, 0.

14 0 0 0 Q. How does the Company plan to meet any additional capacity obligations that it may be assigned as the result of a SRM? A. Company witness Ronk states in his pre-filed direct testimony in U- that the Company intends to make purchases in the MISO planning resource auction (PRA) in the short term until new electric generation capacity can be built to serve those capacity obligations. Specifically, Witness Ronk states: Once the Company does know how much AES retail load it will need to provide capacity for, Consumers Energy will pursue the best feasible option available for each given year. This could include pursuing new PPAs, increasing its energy optimization or demand response programs, or building new generation capacity. However, those options will take time to effectuate. Building a new generation facility could take three to four years. During such a gap period, Consumers Energy may have no other option but to buy capacity from the MISO annual PRA. In particular, the short period of time between AES capacity resource demonstrations in February and the beginning of the first SRM Planning Year on June, 0, would likely leave Consumers Energy with no other option than buying additional needed capacity in the MISO auction, which is not prohibited as an option available to utilities in Section w of Act, and would be consistent with the Company s existing practices for serving new load. [Staff Exhibit S-.0, Direct Testimony of David F. Ronk, Jr., pp -.] Q. Does Staff agree with Consumers Energy s statement that it may have no other option but to buy capacity from the MISO PRA because building a new generation facility could take three to four years? A. While Staff agrees building a new generation facility could take three to four years, Staff does not agree that during such a gap period, Consumers Energy may have no other option but to buy capacity from the MISO PRA. In the instant case, Consumers Energy has shown several options in its capacity replacement plan including energy efficiency, demand response, wind farm expansion, peaker life

15 0 0 extension, contract renegotiations, and asset purchases that all can be implemented in a much shorter time frame than the three- to four-year period that is estimated to build a new generation facility. Furthermore, if the Palisades Contract were to continue through 0, and the Company has the tools to implement some of the items outlined in its proposed capacity replacement plan that the Company claims could be implemented in a shorter one- to two-year timeframe, the Company would have more options available to meet any additional capacity obligations as a result of a SRM. Q. Does the Company s analysis in this case include any costs for new power purchase agreements, increasing its energy optimization or demand response programs, or building new generation capacity to support any level of potential increased capacity obligations that could be assigned to the Company as the result of a SRM? A. While the Company does include some cost projections for energy efficiency, demand response, and other items in its capacity replacement plan, those costs were presented only for the requirements of its current bundled load and not for any additional capacity obligations that would be the result of a SRM. The Company has not included any costs in this analysis for building new generation facilities. Q. If the Company is projecting that it may need to build new generation facilities to support additional SRM capacity obligations during the time period of the buyout, 0 to 0, should plans for those facilities and costs for those facilities have been included in the Company s capacity replacement plan analysis?

16 0 0 A. Yes. The costs for any new facilities should be included in the analysis. If the levelized cost of the proposed new generation facilities is less than the cost of the Palisades Contract, then an early buyout might make sense. However, if the reverse is true, then the early buyout would not likely be deemed reasonable and prudent. Q. Does the Company s analysis include any costs for buying additional needed capacity in the MISO auction for the planning year beginning June, 0 to support any level of potential increased capacity obligations that could be assigned to the Company as the result of a SRM? A. No. Q. Why should the costs to serve potential increased capacity obligations as the result of a SRM in 0 and beyond be considered in the analysis to determine the reasonableness of the early buyout of the Palisades Contract? A. The costs to serve potential increased capacity obligations as the result of a SRM in 0 and beyond should be considered in the analysis because it could impact the economics of the resource decisions made by the Company in both the shortterm and the longer-term time horizons including whether or not an early buyout of the Palisades Contract is reasonable and prudent. If the potential risk of additional capacity obligations as the result of the SRM in 0 was included in the analysis, it s possible that results may not have been as favorable as portrayed by the Company in this case. Q. Has the Company analyzed or prepared contingency plans to serve capacity obligations for ROA customers in the recent past?

17 0 0 A. No, not that I am aware of. Q. If the Company has not analyzed or prepared contingency plans to serve capacity obligations for ROA customers in the past, why is it appropriate to do so now? A. PA Section w provides for a SRM, which the Company has applied for in U- that assigns the incumbent utility responsibility as the provider of last resort for capacity service for alternative electric supplier customers in its territory in the instance that the alternative electric supplier does not make an adequate capacity demonstration as early as June, 0. The Company could be assigned capacity obligations for over 00 ZRCs to cover the capacity obligations of ROA customers as early as June, 0. The Company s capacity replacement plan does not provide any excess capacity that could be utilized to cover those potential obligations for planning year 0, as clearly shown on Exhibit A-. While the state reliability mechanism is new, the risk of being assigned additional capacity obligations is not minor or something that should be ignored. Risks such as the looming possibility of being assigned additional capacity obligations under a SRM is something that the Company should be considering in its analysis. Q. From the Company s case as filed, does it appear that the Company is planning to be able to provide up to 0 ZRCs for 0 ROA capacity obligations, should they be assigned to the Company through the implementation of a SRM? A. No. Exhibit A-, line shows a surplus (shortfall) of zero ZRCs with respect to meeting the requirements of its non-coincident full service peak load in 0 with the implementation of the Company s proposed capacity replacement plan,

18 0 0 leaving absolutely no cushion to absorb any ROA capacity obligations that could be assigned to the Company effective June, 0 under a SRM. Q. If the Palisades Nuclear Power Plant (Palisades Plant) retires in 0 as proposed, would the Company be able to serve the capacity obligations of up to 0 ZRCs, should all of the ROA capacity obligations be placed on the Company effective June, 0 under a SRM? A. Staff has serious concerns about the Company s ability to meet these potential additional capacity obligations. The Company s filing does not address this potential risk. In U-, the Company states its intention to utilize the MISO PRA to procure capacity necessary to meet any ROA obligations that might be assigned to the Company in 0. (Staff Exhibit S-.0, pp -) Staff witness Eric W. Stocking testified that the Company s proposed new plant purchase does not solve the problem, because Dearborn Industrial Generation already exists in MISO Zone (Zone ), so that even with the implementation of the Company s capacity replacement plan, there is a risk that Zone may not meet its local clearing requirement (LCR) and the Zone capacity price could go to the cost of new entry (CONE). Although not explicitly addressed by the Company in this case, Company witness Ronk addresses the 0 capacity risk in his pre-filed direct testimony in U-: The Company anticipates that the PRA clearing price for Planning Year 0 will be substantially higher than in past years and the Company used the April, 0 reverse auction to obtain capacity at prices lower than what it anticipates to result from the MISO CONE refers to the Cost of New Entry. MISO uses costs for a natural-gas fired combustion turbine to define CONE. MISO Zone CONE is currently $0/MW-day.

19 0 0 0 PRA. This expectation is based on the effect of removing approximately 00 MW of capacity from the Michigan capacity market. While some of that capacity will be replaced with load modifying resources, such as the Company s demand response resources, and with capacity additions, such as the modifications being made at the Ludington Pumped Storage Plant, there will be a net reduction in capacity available in Michigan as a result of Entergy s plans not to refuel the Palisades Nuclear Power Plant in the fall of 0 if the Agreement to Amend the Palisades Nuclear Power Plant Power Purchase Agreement between Entergy Nuclear Power Marketing, LLC and Consumers Energy Company obtains the required approvals. [Staff Exhibit S-., MPSC Case No. U-, direct testimony of David F. Ronk, p.] Q. Can Staff determine with certainty that Zone will be short of meeting its LCR and that capacity prices will go to CONE in 0? A. No. Staff cannot make that determination with certainty; however the removal of the Palisades Plant capacity from Zone will definitely increase the risk of a shortage in 0. Q. Is it possible that other load-serving entities in Michigan could introduce new supply-side or demand-side resources into the MISO PRA for 0 that could make it less likely that Zone would not meet its LCR and result in capacity prices that are less than CONE? A. Yes. However, speculating on whether other Michigan load-serving entities would introduce new supply-side or demand-side resources into the MISO PRA for 0 is neither reasonable nor prudent. Q. What is Staff s opinion regarding the quantity of capacity obligations that the Company should plan for in light of the SRM? A. The Company should plan to meet the needs of all of its full service customers, and it should develop a contingency plan to meet capacity obligations for ROA

20 0 0 0 customers that the SRM may assign to the Company as early as June, 0, in a reasonable, prudent, and cost-effective manner. Q. Even though the Company may not have filed a contingency plan to be able to serve the capacity obligations that it may be assigned for ROA customers under a SRM in 0, does the Company have a contingency plan? A. Yes. Company witness Ronk states in U- that the Company intends to purchase ZRCs from the MISO PRA. (Staff Exhibit S-.0, pp -.) Q. Does the Company expect that sufficient capacity will be available to serve the capacity obligations that it may be assigned for ROA customers under a SRM in 0? A. No. In an affidavit filed by Company witness Ronk filed in MPSC Case No. U-, he admits that the Company projects that Zone will be short of capacity in 0: In June 0, MISO published the 0 Organization of MISO States ("OMS") Survey Results. Those results project an approximate 00 MW shortfall with respect to reserve requirements for the Lower Peninsula of Michigan (MISO Local Resource Zone or LRZ ). Likewise, the Michigan Public Service Commission ( MPSC ) in its July, 0 Order in Case No. U- concluded that LRZ is expected to be about 0 MW short of its reserve margin requirements. Consumers Energy's own internal estimate of the capacity position for LRZ for Planning Year 0 is consistent with the conclusions of MISO and the MPSC. Since there appears to be a consensus for a capacity shortfall in LRZ, the Company believes it must act quickly for the benefit of its customers to purchase required available capacity before such capacity is purchased by other load serving entities. [Staff Exhibit S-., MSPC Case No. U-, Ronk Affidavit, p.]

21 0 0 Q. Is the Company s plan to rely solely on the MISO PRA for any additional capacity obligations that it may be assigned for planning year 0 a reasonable and prudent, cost-effective contingency plan? A. Relying solely on the MISO PRA during a time period when the capacity market is expected to be short is not a reasonable and prudent contingency plan. It could be a reasonable plan if the Company expected that sufficient capacity would be available in the 0 MISO PRA at reasonable prices. However, given statements made by the Company in U- and U-, the testimony of Staff witness Stocking in this case, and the testimony of DTE Electric witness Wojtowicz in U-, assuming that sufficient capacity would be available in the 0 MISO PRA does not appear to be a reasonable expectation. (Staff Exhibit S-.0, MPSC Case No. U-, Testimony of David Ronk, pp -; Staff Exhibit S-., MPSC Case No. U-, direct testimony of David F. Ronk, p ; Staff Exhibit S-., MSPC Case No. U-, Ronk Affidavit, p ; Exhibit S-., MPSC Case No. U-, Testimony of Angela Wojtowicz, pp -.) Q. Why is the Company s contingency plan, or lack of a contingency plan, to serve capacity obligations that it may be assigned for planning year 0 relevant to the determination of the reasonableness of regulatory asset treatment for the early buyout of the Palisades Contract in this case? A. Regulatory asset treatment for the early buyout of the Palisades Contract should be granted only upon a satisfactory showing by the Company that it will be able to meet all of its obligations, including a contingency plan to meet potential ROA

22 0 0 capacity obligations under a SRM, throughout the time period when the contract would have otherwise been in effect. Q. Has the Company shown in its direct case that it would be able to meet all of its obligations including contingency provisions for any significant potential obligations that may arise due to assignment of additional capacity obligations pursuant to the implementation of a SRM, throughout the time period when the contract would have otherwise been in effect? A. No. Q. Has Staff considered the projected customer savings that could accrue if the Company implements its capacity replacement plan as proposed? A. Yes. Exhibit A-0 shows a cumulative net present value (NPV) of over $ million based upon projections of the Company s capacity replacement plan from 0 to 00. Utilizing the Company s projections included in Exhibit A-0, considering only the 0 to 0 time period to match the time period of the existing Palisades Contract, the cumulative NPV of the capacity replacement plan is just over $ million, significantly less than 0% of the $ million estimated customer savings advertised in media releases. The early years, 0 through 0, include the impact of the buyout payment and implementation costs while the bulk of the expected customer savings come much later, in years 0 to 00, after the expiration of the current Palisades Contract. Therefore, the timing of the customer savings projected from the capacity replacement plan does not necessarily line up directly with the recovery from customers of the proposed early buyout payment. 0

23 0 0 Q. Are the customer savings presented in the proposed capacity replacement plan strictly tied to the early buyout of the Palisades Contract? A. No, not necessarily. The ability to provide customer savings from certain elements of the capacity replacement plan exist with or without the buyout of the Palisades Contract and some of the elements may be implemented for reasons other than the early buyout of the Palisades Contract resulting in customer savings without paying the $ million buyout payment. Q. What parts of the Company s capacity replacement plan would it be reasonable to expect the Company to implement even if it does not buy out the Palisades Contract? A. First, the Cross Winds expansion may be implemented to meet the increased renewable energy standard in Public Act of 0 (PA ) resulting in over $ million in projected savings as shown on Exhibit A-0. Second, the increased energy efficiency projected on Exhibit A-0 shows expected customer savings near $ million. The customer savings resulting from energy efficiency are based on the addition or expansion of programs to increase the energy efficiency savings target by 0% (from % to.% for the year) allowing the Company to take advantage of the increased financial incentive payment provided in PA. Furthermore, Staff expects that the bulk of the incremental energy efficiency savings mentioned in the replacement plan would be captured in the Company s Energy Waste Reduction Plan filings in order to qualify for the maximum financial incentive mechanism allowed under PA Section or in upcoming Integrated Resource Plan filings that would be required under PA

24 0 0 Section t both regardless of whether or not the early buyout actually takes place. Q. If the Palisades Contract was kept in place longer than 0, would the resulting customer savings shown in the NPV analysis be lower? A. Unfortunately, given the fact that the Company did not provide for the risk of assumption of additional ROA load in its NPV analysis, it is difficult to answer this question. Compared to the NPV the Company provided, if the Palisades Contract remains until 0, the NPV would be lower. However, because the Company s analysis has omitted the risk of additional capacity obligations, the Company s NPV is somewhat unreliable. If we include the risk of additional capacity obligations resulting from a SRM, the NPV analysis may look completely different. It might include additional purchases in the MISO PRA in 0 at a price up to CONE. If statements made by the Company regarding how it might serve those capacity obligations were also included as risk in the analysis, it might include purchases in the MISO PRA in 0, 00, and 0 at prices up to CONE, but likely lower than CONE. According to statements made by the Company, it might also include costs for new generation facilities in the 0 to 0 timeframe to support additional capacity obligations that it may be assigned as the result of a SRM. Q. Does Staff have an estimate of how the NPV analysis presented by the Company would change if all of the SRM capacity obligation risk between 0 and 0 were included?

25 0 0 0 A. No, however Staff is providing an estimate of how the NPV analysis provided by the Company would change if only the 0 SRM risk was included. Staff Exhibit S-. started with the Company s Exhibit A-0 with the following revisions made by Staff:. Line. was added and shows 0 SRM risk as additional costs should the Company be assigned capacity obligations for all of the choice load in its territory and the Company purchased all of those requirements in the MISO PRA at the maximum price of CONE resulting in slightly more than $. million additional costs not identified in the Company s analysis.. Line was modified to include the 0 SRM risk in the total impact of the early buyout and the capacity replacement plan for 0.. Line was added to show the projected NPV of the early buyout and the capacity replacement plan from 0 through 0 which is the end of the buyout period at a % discount rate. The % discount rate was assumed to match what Company witness Blumenstock used in his analysis for the buyout period as opposed to the.% discount rate used by Company witness Clark in his analysis of the longer-term capacity replacement plan. The $ million early buyout payment is already accounted for in this calculation and line shows an expected customer savings of just under $ million over the buyout period.. Line was added to show the projected NPV of the early buyout and the capacity replacement plan from 0 through 00 after the inclusion of the 0 SRM risk, resulting in projected customer savings over the long term of just under $00 million. This $00 million savings projection is directly comparable to the Company s projection of almost $ million on line. Q. Why has Staff included the 0 SRM risk in Staff Exhibit S-., but not included any SRM risk for 0 through 0? A. Staff has included the 0 SRM risk for illustrative purposes and acknowledges that additional SRM risk does exist in the 0 to 0 time period. Staff has not attempted to quantify the SRM risk in the 0 to 0 time period for several

26 0 0 reasons. There is more uncertainty regarding the expected capacity prices in the MISO PRA for later years, because if the maximum price of CONE happens in the 0 PRA, one could assume that load-serving entities would bring on additional resources, likely demand-side resources, quickly, that would temper the capacity prices in the MISO PRA. That also may not happen, and it is possible very high capacity prices could result for several years. Q. What additional conclusions do you draw from the addition of the 0 SRM risk as shown in Staff Exhibit S-.? A. Addition of the full 0 SRM risk results in a dramatic drop in projected customer savings from the early buyout and the implementation of the capacity replacement plan to only about $ million. But even this modest savings is unlikely to actually occur given the Company s stated plans for meeting potential SRM risk during the buyout period. There is a high likelihood that additional MISO PRA capacity purchases between 0 and 0, coupled with costs for new generation facilities in the 0 to 0 timeframe, would eliminate the projected $ million in projected savings during the buyout period if added to the NPV analysis. Adding in the full impact of the SRM risk to the Company during the buyout period could make the early contract buyout uneconomic if the resource options implemented by the Company during the 0 to 0 timeframe to support SRM obligations are more expensive than the Palisades Contract.

27 0 0 Q. Doesn t the existing Palisades Contract include both energy and capacity, and won t the Company only need to procure capacity to support any additional SRM obligations? A. Yes, the existing Palisades Contract includes both energy and capacity and it is true that any additional obligations that may be assigned to the Company as the result of a SRM would be for capacity only. Q. Since any additional ROA obligation will be for capacity only, and the Palisades Contract provides both capacity and energy, why should the Commission consider the costs to cover additional SRM capacity obligations in the analysis of the early buyout of the Palisades Contract? A. When the Company is making resource planning decisions, each individual resource should not be evaluated in isolation. In its proposed capacity replacement plan, not all of the individual elements, if analyzed in isolation, provide customer savings. For instance, the peaker life extension, when analyzed in isolation, does not appear to provide NPV savings to customers, however, when combined with the other elements in the Company s proposed capacity replacement plan, is projected to result in customer savings overall. The same could be said for the Company s total portfolio of resources utilized to meet the Company s obligations in total. The Company should be planning to meet all of its obligations in total at reasonable and prudent costs. The Company has provided insufficient information from which Staff can reach a definitive answer regarding this matter. However, the existing Palisades Contract may provide capacity and energy to

28 0 0 meet a portion of the Company s obligations at lower costs than those that Staff would expect in a short capacity market. And the contract might provide capacity and energy at costs lower than those associated with new generation facilities. Finally, the contract currently already provides energy and capacity at costs lower than a list of other resources that the Company is using to meet a portion of its current obligations during the 0 to 0 buyout period. Staff Exhibit S-. is a discovery request that outlines existing contracts and existing resources owned by the Company to meet the needs of a portion of its obligations that all have higher average costs than the costs in the current Palisades Contract. The analysis of the early buyout of the Palisades Contract should not be made in isolation; a proper analysis will consider how the existing Palisades Contract would fit within the Company s overall portfolio of resources to meet all of its known obligations and contingency planning to meet the known risk of additional SRM obligations through 0. Because the Company is utilizing longer-term customer savings projections to justify the early buyout and the capacity replacement plan, the appropriate method of analysis must include future scenario and sensitivity analysis with additional resource options available for selection. At the very least, the Company should evaluate its proposed early buyout and capacity replacement plan against the continuation of the existing contract and a similar capacity replacement plan that could be implemented beginning in 0, in light of the known risk of additional SRM capacity obligations.

29 0 0 Q. Was the Company asked to provide an updated NPV analysis outlining the impact of its capacity replacement plan while keeping the current Palisades Contract in place through 0? A. Yes. As shown in Staff Exhibit S-., the Company responded: An analysis of the NPV of the Palisades PPA Buyout Replacement Plan executed in 0 has not been completed and would require substantial effort to complete. Additionally, the options identified by the Company in the Palisades PPA Buyout Replacement Plan may not be available in 0. Furthermore, the savings associated with terminating the Palisades PPA early would not be realized resulting in higher costs overall to the Company s customers. Q. Does Staff agree with the Company s decision to not consider the alternative costs of continuing the existing contract through 0 and implementing its proposed capacity replacement plan in 0 as part of its decision making process? A. No. The $ million buyout payment is a significant cost and an analysis of alternatives, including the implementation of its capacity replacement plan, or a similar capacity replacement plan if there was concern regarding the availability of some of the elements if delayed, is warranted in order to make an informed decision regarding whether or not to move forward with an early buyout of the Palisades Contract. Q. Does Staff agree with the Company s decision to not consider potential increased capacity obligations and potential increased costs that could arise in 0 as the result of a SRM in its analysis? A. No. It is possible that the Company may be assigned additional capacity obligations of up to 0 additional ZRCs in 0, which the Company intends to purchase from the MISO PRA in 0 when there would be an elevated risk of a

30 0 0 capacity shortage in Zone and a capacity price of CONE if the Palisades Plant does not refuel in October 0 as planned. The additional cost for 0 ZRCs at CONE ($0.00/MW-day) would be over $. million for 0 in costs that are not included in the Company s analysis. This is a significant risk and the Company s analysis is deficient for omitting the consideration of this risk. The results of adding this single risk to the Company s analysis is shown on Staff Exhibit S-.. The NPV, or expected customer savings, resulting from the Company s proposed early contract buyout, the proposed capacity replacement plan, and risk of additional SRM obligations is only slightly over $ million for the 0 to 0 timeframe aligning with the period of the current Palisades Contract. Q. Please summarize Staff s recommendation regarding the approval of a regulatory asset in this case. A. Staff recommends that the Commission deny regulatory asset treatment of the proposed early buyout of the Palisades Contract because the Company s analysis is deficient and does not address the near-term risk of additional capacity obligations arising as the result of a SRM in 0. Inclusion of the 0 SRM risk into the Company s early buyout and capacity replacement analysis reduces the expected customer savings to approximately $ million for the 0 to 0 period. The Company s analysis was also deficient for not presenting an analysis of an alternative capacity replacement plan implemented at a later date, MISO, 0/0 Planning Resource Auction Results, < (accessed May, 0).

31 0 0 such as 0, when the current Palisades Contract expires. The early buyout of the Palisades Contract contributing to an October 0 retirement increases the risk that the Company may be unable to meet its potentially increased 0 capacity obligations. For these reasons, Staff recommends that the Commission deny regulatory asset treatment for the early buyout of the Palisades Contract in this case. Potential Alternatives Q. Does Staff have other alternatives for the Commission to consider in this case? A. Yes. Q. Why is Staff presenting other alternatives for the Commission s consideration in this case? A. While Staff considers the Company s case deficient because it does not address the potential risk associated with the implementation of a SRM in 0, Staff acknowledges that no additional capacity obligations have been assigned to the Company as of this date. Staff admits that it is possible that the alternative electric suppliers in the Company s service territory could all make successful capacity demonstrations for the 0 planning year meaning that there would not be any additional capacity obligations assigned to the Company for the 0 planning year. While the Company should be considering the near-term risk of additional capacity obligations assigned through a SRM as early as 0 in its planning and developing contingency plans to be able to meet potential increased obligations, Staff acknowledges that the Company and the Commission may view this as a premature expectation. Staff acknowledges that other parties may view

32 0 0 the development of contingency plans to meet potential obligations that could be placed on the Company due to the implementation of a SRM as undesirable because it could result in increased costs if the Company is overly conservative and plans for obligations that might not materialize. For these reasons, Staff is also presenting alternative analyses of the reasonableness and prudence of the $ million early buyout payment. Q. Does Staff consider these alternatives to be equally beneficial to ratepayers? A. No. Staff only recommends these alternatives if the Commission does not outright deny regulatory asset treatment for the early buyout. Further, the alternatives are set out below in descending order of preference. Alternative One: $ Million Regulatory Asset Q. Please explain your understanding of how the Company arrived at the total savings estimate of $ million. A. A process of negotiations between the Company and Entergy Nuclear Power Marketing, LLC (Entergy) was utilized to develop the total savings estimate and the proposed buyout payment. Company witness Blumenstock testifies that [t]he final agreed upon gross savings was $ million and the final agreed upon buyout payment was $ million (% lower than Entergy s originally proposed buyout payment). (Blumenstock direct testimony, p.) Q. Has other evidence been provided through the discovery process that could be informative regarding the result of the negotiations between the Company and Entergy? 0

33 0 0 A. Yes. Staff finds it interesting that Entergy shows the net book value of the Palisades Plant is $ million, identical to the negotiated buyout payment, which purportedly represents a projection of customer savings. (Exhibit S-. Entergy s discovery responses ST-EN- through ST-EN-.) The most current market valuation of the Palisades Plant is $0 million. (Id.) Q. If the Commission approves regulatory asset status for the early buyout of the Palisades Contract, should the amount approved be $ million? A. No. If the Commission concludes that the early buyout of the Palisades Contract is warranted, Staff has analyzed the amount of projected savings that the customers may realize and has determined that the negotiated $ million buyout payment is too high. The expected savings from the capacity replacement plan do not justify the approval of the entire $ million negotiated buyout payment. Q. Please explain why Staff asserts that the expected savings from the capacity replacement plan do not justify the approval of a regulatory asset in the amount of $ million. A. Exhibit A-0 shows a total NPV projected for the Company s proposed capacity replacement plan of over $ million; however, that projected NPV includes projected savings from the capacity replacement plan far beyond the expiration of the current Palisades Contract in 0. Considering the annual projected NPV savings of the capacity replacement plan from 0 through 0, shown on line of Exhibit A-0, the NPV of expected customer savings would be $,,000, which falls far short of $ million, let alone $ million.