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In the Matter of Minnesota Power’s 2013-2027 Integrated Resource Plan 20139-91328-01 MN power carbon pricing.pdf

In the Matter of Minnesota Power’s 2013-2027 Integrated Resource Plan 20139-91328-01 MN power carbon pricing.pdf

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Published by Dan Feidt
Should the Commission approve MP’s 2013-2027 resource plan? Should the Commission take any further actions in the resource plan?
Minnesota Power’s 2013 resource plan is unique for several reasons. First, the comment periods were shortened to recognize the urgency for compliance with EPA’s Mercury and Air Toxics Standards (MATS).1 Second, a preliminary completeness review was brought before the Commission in April 2013 to identify potential issues of dispute, and MP filed supplemental information concerning areas of interest to the Commission. Third, because this resource plan incorporates the Company’s MATS compliance strategy, this resource plan focuses on existing facilities, which is not normally as central to resource planning.
Ideally, resource plans make generic findings about which resources could meet a utility’s projected need and when. MP explores the circumstances under which retiring certain existing coal-fired units is more cost-effective than continuing to operate them. Thus, the size, type, and timing of MP’s resource need depend on the Company’s short-term MATS compliance strategy and long-term CO2 emissions minimization strategy.
Should the Commission approve MP’s 2013-2027 resource plan? Should the Commission take any further actions in the resource plan?
Minnesota Power’s 2013 resource plan is unique for several reasons. First, the comment periods were shortened to recognize the urgency for compliance with EPA’s Mercury and Air Toxics Standards (MATS).1 Second, a preliminary completeness review was brought before the Commission in April 2013 to identify potential issues of dispute, and MP filed supplemental information concerning areas of interest to the Commission. Third, because this resource plan incorporates the Company’s MATS compliance strategy, this resource plan focuses on existing facilities, which is not normally as central to resource planning.
Ideally, resource plans make generic findings about which resources could meet a utility’s projected need and when. MP explores the circumstances under which retiring certain existing coal-fired units is more cost-effective than continuing to operate them. Thus, the size, type, and timing of MP’s resource need depend on the Company’s short-term MATS compliance strategy and long-term CO2 emissions minimization strategy.

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Minnesota Public Utilities Commission

Staff Briefing Papers

Meeting Date:

September 25, 2013 .............................................................. **Agenda Item # 3

Company: Docket No.

Minnesota Power (MP or the Company) E015/RP-13-53 In the Matter of Minnesota Power’s 2013-2027 Integrated Resource Plan

Issues:

Should the Commission approve MP’s 2013-2027 resource plan? Should the Commission take any further actions in the resource plan?

Staff:

Sean Stalpes ................................................................................. 651-201-2252

Relevant Documents Minnesota Power Resource Plan, initial filing .......................................................... March 1, 2013 Staff briefing papers on completeness ....................................................................... April 17, 2013 Commission Order Finding Resource Plan Complete ................................................ May 10, 2013 Minnesota Power, Supplemental Filing as required by Commission Order ............... May 15, 2013 Department of Commerce, initial comments ................................................................ June 3, 2013 Environmental Intervenors, initial comments ............................................................... June 3, 2013 Large Power Intervenors, initial comments .................................................................. June 3, 2013 Department of Commerce, reply comments .................................................................. July 3, 2013 Environmental Intervenors reply comments .................................................................. July 3, 2013 Large Power Intervenors, reply comments .................................................................... July 3, 2013 Minnesota Power, reply comments ................................................................................ July 3, 2013

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.

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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This document can be made available in alternative formats (e.g., large print or audio) by calling 651-296-0406 (voice). Persons with hearing loss or speech disabilities may call us through their preferred Telecommunications Relay Service.

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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Contents
Staff Comment on the Scope of This IRP ..................................................................................................... 4 Staff Comment on Modeling ........................................................................................................................ 7 MP Initial Filing.......................................................................................................................................... 11 Company Background ............................................................................................................................. 11 Generation .............................................................................................................................................. 11 Transmission ........................................................................................................................................... 12 Renewable Energy .................................................................................................................................. 13 Demand-Side Management ..................................................................................................................... 17 Needs Projection ..................................................................................................................................... 18 Action Plan Summary ............................................................................................................................. 20 Plan Development ................................................................................................................................... 22 1. 2. 3. 4. MATS compliance ...................................................................................................................... 22 Retrofit, Refuel, or Retire ........................................................................................................... 24 Identify a Preferred Expansion Plan ........................................................................................... 28 Scenario Analysis........................................................................................................................ 29

Party Positions ............................................................................................................................................ 32 Departments of Commerce ..................................................................................................................... 32 Environmental Intervenors ..................................................................................................................... 39 Large Power Intervenors ........................................................................................................................ 41 Non-Party Comments.................................................................................................................................. 46 Schroeder Township................................................................................................................................ 46 Town of Tofte .......................................................................................................................................... 46 City of Aurora ......................................................................................................................................... 46 Public Comments .................................................................................................................................... 46 Staff Analysis .............................................................................................................................................. 47 Decision Options......................................................................................................................................... 63

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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Staff Comment on the Scope of This IRP
Minnesota Power’s 2013 resource plan is unique for several reasons. First, the comment periods were shortened to recognize the urgency for compliance with EPA’s Mercury and Air Toxics Standards (MATS). 1 Second, a preliminary completeness review was brought before the Commission in April 2013 to identify potential issues of dispute, and MP filed supplemental information concerning areas of interest to the Commission. Third, because this resource plan incorporates the Company’s MATS compliance strategy, this resource plan focuses on existing facilities, which is not normally as central to resource planning. Ideally, resource plans make generic findings about which resources could meet a utility’s projected need and when. MP explores the circumstances under which retiring certain existing coal-fired units is more cost-effective than continuing to operate them. Thus, the size, type, and timing of MP’s resource need depend on the Company’s short-term MATS compliance strategy and long-term CO2 emissions minimization strategy. Relationship to MP’s Previous IRP In MP’s 2010 IRP proceeding, the Commission ordered MP to develop a baseload diversification study (BDS) to address the “retire, retrofit, or refuel” question posed to MP’s existing coal fleet impacted by newly promulgated EPA rules. While the Department of Commerce (DOC) recommended certain coal units could be retired as a credible outcome of the BDS, MP did not agree that unit decisions could be made from the BDS. MP’s reply comments in the baseload study proceeding state: Despite what some parties suggest, the BDS does not provide valid economic or reliability information for taking responsible, material action on any individual Minnesota Power units or its system as a whole that would result in billions of dollars of impact on customers. Now that MP is on an actionable path to comply with MATS, there is a different interpretation of how the BDS informs unit-specific dockets. For example, the Company’s Boswell 4 Retrofit Petition states that MP “identified in its Baseload Diversification Study that the Boswell Unit 4 Retrofit Project was the most economic environmental compliance alternative”. 2 As MP has stated previously and in this resource plan, the IRP process does not finalize projectspecific decisions – it informs them. As the Commission considers the Company’s MATS compliance strategy in this proceeding and in future petitions, Staff refers the Commission to Appendix D of MP’s 2013 resource plan, in which the Company states: 3

Under the Clean Air Act, affected sources have three years (until April 2015) to comply with MATS. A fourth year for compliance is available if reliability issues exist. MP has only requested an extension for Boswell 4. 2 Docket No. E015/M-12-920, In the Matter of MP’s Mercury Emission Reduction Plan Petition and Petition for Approval of the Rider for Boswell Energy Center Unit 4 Emission Reduction, p. 12 of MP Reply Comments. 3 Appendix D, p. 6

1

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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The Strategist Proview simulations are not robust enough to dictate the ultimate retirement planning decision for a generating asset; they can, however, be a useful planning tool to narrow the options through careful evaluation of the retirement timing trends seen and as they are stressed through multiple sensitivities and plausible scenarios for future economic and power supply variables. Three major areas of MP’s five-year action plan encompass its MATS compliance, wind additions, and 2015 capacity deficit: 1. MP’s Laskin natural gas refuel project and Taconite Harbor 3 retirement are included as part of the Company’s “Preferred Plan” because each complies with MATS, is costeffective in most scenarios, and is part of the Company’s long-term plan to reduce carbon emissions. (MP also proposes to retrofit Boswell 4 and continue its operation as a coalfired resource. Staff does not provide decision options for the Commission concerning Boswell 4 in this IRP. MP notes in the IRP that alternatives at Boswell 4 are reserved for consideration under the Boswell 4 Retrofit Project, Docket 12-920.) 2. MP’s IRP includes the addition of a minimum of 100 MW and up to 200 MW of wind that would be installed in the next two to three years, with plans subject to the availability of the Production Tax Credit (PTC). Consistent with this intention, on August 1, 2013, MP announced its plans to construct Bison 4, a 200 MW wind addition in North Dakota. 3. With or without the Taconite Harbor 3 retirement, MP expects to begin to accumulate a capacity deficit in 2015. MP plans to procure cost-effective bilateral purchases as a bridge until 2020-2021. The decision options on page 63 of this document enable the Commission to define its own scope of this IRP. The Commission can approve the plan and take no other action, or the Commission can make findings of fact, require compliance filings to further inform the record, and set requirements for the Company’s next IRP. MP has indicated the Company will be making a separate filing later this year for approval of its Bison 4 project. Its Boswell 4 MATS compliance strategy is being addressed in Docket No. 12920. It does not appear that further regulatory approvals are required for MP to refuel Laskin or retire Taconite Harbor 3. However, upon approval of its resource plan, MP expects to make an Attachment Y request with MISO for retiring Taconite Harbor 3.

Implications for MP’s Depreciation Accounting MP’s retirement analysis basically considers three main categories of costs: 1. remaining asset value; 2. decommissioning cost; and 3. replacement capacity and energy cost.

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While MP’s retirement analysis will be discussed later in this document, Staff reminds the Commission of the IRP’s overlap with MP’s 2012 Remaining Life Depreciation Petition (Docket No. 12-378). In MP’s October 29, 2012 reply comments in Docket 12-378, the Company suggested the Commission “address and decide” issues related to the remaining lives of existing coal-fired facilities in this IRP: Minnesota Power believes that issues related to resource decisions and remaining lives are best addressed and decided as part of Minnesota Power’s 2013 IRP and associated depreciation studies. Intervening parties did not discuss, or provide recommendations for, how remaining lives should be “addressed and decided” in this IRP, other than when or if certain units should be retired. MP’s October 29, 2012 reply comments in Docket 12-378 provide the remaining life for the following coal-fired facilities:

The remaining asset value significantly impacts the decision of when (or whether) to retire an existing unit. According to Appendix H of MP’s Petition, the remaining asset value of any facility being retired is treated as a cost which is assumed to be recovered from customers over a 10-year period after the retirement takes place. This is strictly a modeling choice on the part of the Company. Staff recommends that MP’s assumptions about cost recovery in the modeling of the instant IRP do not in any way decide whether or how MP will get that recovery. According to the Company, “Upon approval of this 2013 Plan, MP will continue to depreciate Laskin Energy Center and Taconite Harbor Energy Center each as one facility with one remaining life. Assets retired in 2015 will be accounted for as normal retirements of utility plant.” MP intends to submit a compliance filing with final accounting entries in late 2015 or early 2016 when final retirement amounts are available. 4
4

Approximately $5 million in net remaining plant balance for Laskin Energy Center and $15 million in net remaining plant balance for Taconite Harbor 3 are expected to be retired. Laskin Energy Center and THEC1&2 will continue operations, and the remaining net plant balances retired will be recovered over the remaining lives of those plants.

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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Staff Comment on Modeling
As stated above, evaluating retirement, retrofit, or refuel options for the Company’s existing coal fleet is central to MP’ resource plan. Because unit performance is so closely tied to unit decisions, and because the parties’ comments discuss very granular details about the appropriate operation of the system, it may be useful to briefly discuss why these details are important to the Commission for an IRP. A load and capability (L&C) balance informs the size and timing of generation resources that should be added to meet customer demand. The function of an L&C table is to provide a comparison between the amount of generating capacity available and the peak load of a system plus planning reserves. Each existing resource that makes up the L&C table is modeled separately in Strategist and includes both operational characteristics and costs of operation. The economics of system dispatch are sensitive to the alternatives Strategist is allowed to consider and the assumed costs of running the units themselves. Assumptions for heat rates, outages, operation and maintenance, and availability of market energy can all impact unit dispatch and, in turn, affect projected capacity factors for existing thermal units. Thus, the mix and characteristics of all available generation to a system affect the generation expected from any particular unit (and whether it functions as a peaking, intermediate, or baseload resource). Each thermal unit in the L&C table also has an annual fixed cost. Within that fixed cost is a revenue requirement for the capital cost for equipment needed to comply with EPA rules. Therefore, the impact of MATS on MP’s existing coal facilities could be a capital investment included in the Present Value Revenue Requirement (PVRR). For example, if a coal unit requires a dry scrubber to treat the unit’s flue gas, a fixed capital investment is included in the PVRR and compared to the retirement cost associated with that unit. Some of MP’s units are already controlled to meet (or nearly meet) MATS requirements. Thus, the impact of MATS could alternatively be an increase to a unit’s operating costs (in $/MWh). For example, if a unit only requires additional sorbent to reduce acid gases, this additional cost could make the unit more expensive to operate, and as a result, Strategist may dispatch other, more economical, resources instead. Since MP’s coal units provide baseload generation to the system, the extent to which alternatives could reasonably replace those facilities with historically high capacity factors can come with their own cost and technical limitations. MP discusses the relative benefit of one MATS strategy over another in terms of a “full production cost analysis” of its system in Strategist. This includes projections of fuel costs, externalities, and wholesale market interaction incorporated with operational factors, such as the forced outage history and actual dispatch history. MP’s MATS compliance strategy, and the expansion plan that follows it, implies the system is being appropriately optimized by the Strategist model. The extent to which system optimization is achieved is bounded by a user-defined set of resource technologies and prescribed sets of constraints and assumptions. In this record, disagreement exists concerning a wide variety of

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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planning assumptions, which ultimately leads to differences in recommendations that certain coal units should be retired, refueled, or kept as coal-fired facilities. Strategist can formulate hundreds of thousands of possible resource combinations to construct a least-cost expansion plan. As the need for additional capacity increases, the number of possible combinations also increases. Narrowing the number of alternatives for evaluation shortens the model run-time (which can require weeks) and enables better verification and validation of the model. Both MP and the Department narrowed Strategist in its own way. MP ran four “swim lanes,” each with a base case and 21 sensitivities (88 outcomes). The Department ran 15 different scenarios, each with 31 different contingencies (465 outcomes). How units are assumed to operate to serve both the demand and energy requirements of the system is a critical component of the modeling. Navigating the complexities of the Strategist model to verify these assumptions is not normally as central to IRP, at least for the Commission. The fact remains, substantial capital expenditures will be necessary to bring MP into compliance with MATS in the short-term. The parties’ recommendations to the Commission regarding the best path forward are grounded largely on these granular aspects of system planning.

Boswell 4 MP’s IRP scenario analysis does not give the Commission a clear picture of how a natural gas alternative at Boswell 4 would realistically affect its action plan. MP provides options for what generation could replace Boswell 4 in Docket 12-920, but these options do not reflect how all of MP’s electric supply resources would operate to serve both the demand and energy requirements of the system. The Commission could decide in Docket No. 12-920 that a natural gas alternative is preferable. Since Boswell 4 provides roughly one quarter of MP’s energy requirements, it may have little value to approve MP’s resource plan if the Commission moves the Company toward repowering the unit. According to MP’s response to PUC IR #6c. in Docket 12-920: The natural gas build schedule would likely create a 2 to 3 year period of power supply deficit between the time when Boswell 4 would be shut down and when the new natural gas facility would be available. MP would need to seek alternative power supply options for 478 MW of capacity and approximately 3 million MWhs of energy each year to serve its customers. This volume of near term market interaction would more than double Minnesota Power’s current near term market utilization for normal operations. This level of market interaction would create significant risk for implementing Minnesota Power’s current near term least cost strategy. MP states in its IRP reply comments that the Company’s utilization of near-term market purchases for its power supply strategy has averaged 18 percent since 2004. 5 If MP plans to “more than double” this exposure to the wholesale market, Staff believes the entire resource plan
5

MP July 3, 2013 reply comments, p. 18.

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should be revisited because MP’s instant IRP does not reasonably plan for Boswell 4 to be refueled. 6

Demand-Side Management On May 15, 2013, MP filed its Supplement to the IRP, pursuant to the Commission’s completeness order requesting further information. Among those topics ordered by the Commission was how MP evaluates demand side management (DSM) programs in the modeling. The Commission asked MP whether DSM is considered as a reduction in load versus a resource to be chosen at an optimal level. According to the Company’s Supplement, MP utilizes a combination of load reduction and resource alternative methods for incorporating DSM into its resource planning evaluation. Since each DSM option is unique, MP does not believe there is not a one-size-fits-all approach for evaluating DSM in general. The Department hosted a multi-utility and stakeholder discussion on DSM and MISO modeling on May 28, 2013. Members of the DOC, Commission Staff, Center for Energy and Environment, and several utilities—including MP—were present. MP explained at the stakeholder meeting that existing DSM is embedded in the load forecast, but Strategist considers future DSM as a resource option. For example, MP’s IRP discusses a roughly 7 MW direct load control program which is separate to its load forecast. For energy savings, though, MP assumes a constant annual savings of approximately 52.3 million kWh, which is embedded in the load forecast. This annual savings level presumably corresponds to an amount at or above the 1.5 percent savings goal. MP’s 52.3 kWh of savings is included in Table 1 of Appendix B.

6

MP states in response to PUC IR#6 that “intermittent wind and solar would not be viable candidates and additional dispatchable hydro above current levels is not currently available in the region until the 2020 time period.”

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The Department does not have a standardized method for modeling DSM. DOC explained at the stakeholder meeting that, in IRP, the Department receives the commands from the utility to evaluate its DSM. Thus, DOC has several different methodologies for DSM evaluation because several different methodologies exist among the utilities. Typical of most Minnesota utilities, MP’s DSM has the effect of offsetting the demand and sales forecast, and the IRP determines the least-cost expansion plan given the net resource requirement with DSM already accounted for. In Attachment A, Staff includes a table from a report prepared for the California Public Utilities Commission,7 which shows the variety of ways DSM and energy efficiency can be incorporated into modeling. If the Commission wants to know how DSM and energy savings can be modeled within a utility’s planning software on an equivalent basis to supply-side resources, Attachment A provides examples of other utilities which utilize that method of evaluation.

Aspen Environmental Group & E3, “Survey of Resource Planning and Procurement Practices,” prepared for the California Public Utilities Commission, pp. 65-67.

7

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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MP Initial Filing
Company Background Minnesota Power (MP) serves about 144,000 retail electric customers and 16 municipal systems in central and northeastern Minnesota. More than half of MP’s total energy supply is sold to industrial customers with continuous operation. As a result, MP has a higher load factor and less variable load profile than most utilities. Generation MP generates about 80 percent of its energy from coal-fired units, primarily at its Boswell, Laskin and Taconite Harbor Energy Centers in Minnesota.

Unit Boswell 1 & 2 Boswell 3 Boswell 4 8 Laskin 1 & 2 Taconite Harbor 1 & 2 Taconite Harbor 3

Net Output (MW) 140 365 585 110 150 75

Year in Service 1958, 1960 1973 1980 1953 1957 1967

1. Boswell Energy Center Boswell Energy Center (BEC) consists of four coal-fired generating units with a shared infrastructure. BEC provides approximately 1,000 MW of capacity and nearly half of the Company’s energy requirements. The Minnesota Mercury Emissions Reduction Act (MERA) requires Boswell 3&4 to install mercury emission controls with the goal to achieve up to 90 percent mercury removal. Boswell 3 has already complied, and MP is currently requesting approval for its Boswell 4 Retrofit Project in Docket 12-920. 2. Taconite Harbor Energy Center Taconite Harbor Energy Center (THEC) is located near Schroeder, Minnesota, on the North Shore of Lake Superior. THEC consists of three 75 MW coal-fired generating units, with a total capacity of 225 MW. The generators all operate at capacity factors of 60 to 75 percent on an annual basis.
8

MP owns 497 MW of Boswell 4 with the balance owned by WPPI Energy.

Staff Briefing Papers for Docket No. E015/RP-13-53 on September 25, 2013

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THEC does not have direct access to natural gas as a fuel source. No pipeline is present, and the closest access is 30 miles from the facility. THEC is located at an active shipping port on Lake Superior and receives coal shipments via boat for its operations. As part of MP’s Arrowhead Regional Emissions Abatement (AREA) plan in 2006-2008, Taconite Harbor 1 and 2 have been retrofitted with NOX, SO2, and mercury emissions control equipment. Therefore, MP believes Taconite Harbor 1 and 2 are well-positioned to meet the requirements of EPA’s MATS rule in 2015. Taconite Harbor 3, however, does not currently have the necessary emission controls in place to meet the MATS requirements. 3. Laskin Energy Center Laskin Energy Center (LEC) is located near Hoyt Lakes, Minnesota. The facility is in close proximity to one of the major natural gas pipelines in the region, Northern Natural, and utilizes natural gas as a starting fuel for its current coal-fired operations. The units have operated at capacity factors of 50 to 60 percent over the past six years as market and operating conditions have changed. LEC also had emissions controls installed as part of MP’s AREA. However, the EPA MATS rule would require that LEC install additional boiler injection technology to further reduce mercury emissions. Transmission 1. The North Shore Loop MP refers to the “North Shore Loop” as an area of its transmission system that is “extremely generation-rich and serves a significant portion of the large industrial customers in Minnesota Power’s load requirements.” 9 The North Shore Loop includes the 115 kV and 138 kV transmission system between Duluth, Taconite Harbor, and LEC, as well as the three 115 kV lines that extend from the Laskin facility to the rest of the transmission system.

2. Great Northern Transmission Line MP expects to file a certificate of need for the Great Northern Transmission Line by the end of 2013. 10 The project will include high voltage connections between Manitoba and the Arrowhead Substation in St. Louis County, Minnesota, to enable deliveries from Manitoba Hyrdro. The proposed construction includes approximately 225-300 miles of 500 kV transmission line and approximately 50-70 miles of 345 kV transmission line.

9

10

Appendix F, p. 14. Docket No. E015/CN-12-1163

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The Great Northern Transmission Line is intended to provide delivery of at least 250 MW of energy and capacity from Manitoba Hydro by June 1, 2020 under a Power Purchase Agreement approved by the Commission in Docket No. 11-938.

3. The DC Line In 2010, MP finalized its purchase of a 465 mile, 250-kilovolt high voltage direct current transmission line which connects Center, North Dakota with the Arrowhead Substation in Hermantown, Minnesota. This “DC Line” is expected to facilitate the delivery of wind power generated in North Dakota to MP’s customers. MP expects to complete a 50 MW upgrade to the DC Line by the end of 2013 to further develop the reliability of its Bison Wind projects. MP is evaluating “a series of modernization activities” to the DC Line to possibility increase its deliverable capacity up to 750 MW in the future. Renewable Energy Minnesota’s Renewable Energy Standard (RES) requires MP to generate or procure at least the following percentages of total Minnesota retail electric sales with eligible renewable energy technologies by the end of the year indicated: • • • • 12 percent by 2012 17 percent by 2016 20 percent by 2020 25 percent by 2025

1. Biomass and Hydro MP’s “Renewable Base” (Table 1 below) is comprised of biomass and hydro resources and meets approximately 6 percent of MP’s projected 2025 retail electric sales. 11

Thomson Hydro station is currently inoperable for an undetermined amount of time due to damage sustained in the severe flooding of June 2012. Thomson Hydro is still a component of MP’s IRP, and MP does not anticipate the inoperability to affect the achievability of the RES.

11

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Also, a non-firm energy supply PPA with Manitoba Hydro is assumed to count as renewable energy credits (RECs) and covers a period from May 1, 2011 through April 30, 2022. 12 Planned Biomass Expansion Projects A. Rapids Energy Center Optimization Rapids Energy Center (Rapids) is a non-regulated co-generation facility located at the Blandin Paper Mill in Grand Rapids, Minnesota. Rapids is fueled by a mixture of wood and coal. MP currently has before the Commission a Petition for approval to increase the biomass generation at Rapids by approximately 56,000 MWh per year by 2015. 13 The Rapids Project will not result in increased nameplate electric generation capacity at Rapids; instead, the goal of the project is to improve the capability for Rapids to more routinely utilize the full nameplate capacity of its solid fuel boilers and connected turbines. Rapids currently generates approximately 70,000 RECs per year. These RECs are included in the Company’s internal projections for meeting 2025 RES requirements. While MP does not project a shortage of RECs to meet current RES requirements in the next ten years, may need to use banked RECs in order to meet the 25 percent goal in 2025. B. Hibbard Expansion Hibbard Renewable Energy Center (Hibbard) is a coal and biomass generation facility located in Duluth, Minnesota. MP plans to increase in biomass generation at Hibbard by 140,000 MWh per year. MP has not yet determined its expansion schedule at Hibbard. The expansion was scheduled to be completed in the 2012/2013 timeframe, but has been delayed to a yet-to-bedetermined future date to better coincide with MP’s anticipated needs for renewable energy.

2. Wind Additions Between 2006 and 2011, MP executed several PPAs and constructed a wind facility to increase its renewable energy supply to approximately 12 percent of projected 2025 electric sales. Upon commercial operation of approved renewable energy projects, MP’s renewable portion of retail supply will increase to approximately 18 percent by the end of 2013. The Bison wind projects near Center, North Dakota have been the bulk of MP’s renewable energy additions since 2010. The 81.8 MW Bison 1 project came online in two phases, the first phase in December 2010, and the second in January 2012. Adjacent to Bison 1, Bison 2 and 3 are each 105 MW projects which became commercially available in December 2012. MP owns,
Docket No. E015/M-10-961 Docket No. E015/M-12-1349, In the Matter of the Petition of Minnesota Power for Approval of Transferring the Assets of Rapids Energy Center to Regulated Operations and Approval For Investments and Expenditures in the Rapids Optimization Project for Recovery through Minnesota Power’s Renewable Resources Rider under Minn. Stat. § 216B.1645.
13 12

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operates, and maintains the Bison facilities for long-term use as a rate-based renewable wind generation resource. On August 1, 2013, MP announced its plans to construct Bison 4, a 200 MW expansion of its Bison wind project. 14 Bison 4 will be constructed in Oliver County, North Dakota. The expansion will include a new substation and approximately 11 miles of a 230 kV transmission line. MP has filed a site permit application with the North Dakota Public Service Commission and intends to submit a request to the Minnesota Commission for project approval and cost recovery through MP’s Renewable Resources Rider. Table 2 summarizes the projected annual energy production and estimated capacity additions of committed and planned renewable resource additions.

The renewable resource additions in Table 2 were also filed in Docket No. E999/M-12-958 (the biennial RES compliance review). In 12-958, the Commission did find MP to be in compliance for the past two years and anticipated compliance going forward. Figure 1 below shows that – pending approval of the Bison 4 project, Hibbard expansion, and Rapids optimization – MP will continue to meet its RES obligations. The committed wind projects have increased MP’s renewable resource portfolio to about 18 percent of projected 2025 sales. Bison 4 would increase this percentage further, up to about 24 percent of projected sales.

Staff notes that MP’s March 1, 2013 IRP filing included plans to issue an RFP for up to 200 MW of wind capacity and energy. On April 2, MP filed a Wind RFP Update, including a summary and schedule of the wind RFP.

14

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The estimated costs of MP’s renewable plan are provided in Figure 3 (from Appendix G of the Petition). The levelized revenue requirements of MP’s renewable projects (the green line) are projected to be priced competitively with the longer-term outlook for wholesale market energy prices (the red line). The blue line shows the annual revenue requirements. As shown in the figure, the recent spike in annual revenue requirements is due to the Bison projects.

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MP used the estimated project costs to approximate the rate impact of the renewable energy projects over the long term. MP calculates that its identified renewable projects are estimated to have an average of a $3 per MWh cost impact for customers from 2007 to 2026.

Demand-Side Management
MP includes a prospective air conditioning (AC) cycling program as an expanded DSM program for its 2013 Plan evaluation. This program expansion amounts to a total peak reduction of approximately 7.6 MW by year 15 of the program. Due to economical generation alternatives presently available, as well as regional surpluses, MP notes the benefits of the AC cycling program are likely to be limited in the near term. MP expects the earliest an AC cycling program could be implemented for customers would be the 2015 timeframe to accommodate additional design and gain regulatory approvals. MP’s Preferred Plan includes achieving the 1.5 percent savings goal throughout the planning period. MP assumes in each year of the planning period that the Company will achieve approximately 52.3 million kWh of energy savings, which is consistent with the historical performance of its energy efficiency programs. The impacts of MP’s energy savings are

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embedded in the energy sales forecast. MP did not include in its Petition additional analysis that evaluates achieving higher levels of conservation energy savings than the 1.5 percent. On June 3, 2013, MP filed its 2014-2016 Triennial Conservation Improvement Program (CIP). 15 MP proposed a plan which, according to the Company, meets the 1.5 percent energy-saving goal and has program budgets well above the minimum spending requirements for conservation program efforts. MP calculates its energy-saving goal and spending requirements in accordance with the CIP statute, using “gross annual retail energy sales” and “gross operating revenues”. 16 Proposed programs and budgets are made within the context of those calculations. As a result of legislation passed in May 2013, Minn. Stat. §216B.2401 was amended from an annual energysaving policy goal equal to 1.5 percent, to a policy goal of at least 1.5 percent of annual retail energy sales of electricity and natural gas through a variety of programs or actions that may, or may not, involve direct utility involvement. (CIP is an example of a conservation-related program that does involve direct utility involvement.) MP does not believe the statute amendment changes any requirements for MP’s large industrial customers nor does it change the Commission’s jurisdiction over CIP. There was no repealer or amendment to Minn. Stat. §216B.241 which changes MP’s large power customers to petition for CIP exemptions. Therefore, “retail energy sales” still exclude, by definition in statute, electric sales to large customers that have obtained approval from the Commissioner of Commerce to be exempt from CIP. MP believes large customers are already highly incentivized to conserve energy and adopt energy-saving practices in order to control utility related expenses. Needs Projection As a MISO member and market participant, MP falls under the requirements of the MISO Module E Resource Adequacy Program for near-term planning. MP is a winter-peaking utility, but bases its resource need on the summer season MISO Load and Capability (L&C) balance. Since most other regional utilities are summer peaking and, accordingly, have large winter capacity surpluses, winter capacity is typically available for purchase. Figure 5 presents MP’s base case summer season L&C. As illustrated by the red bar in Figure 5, MP’s coal fleet comprises about 1,300 MW of MP’s 1,700 MW of capability. Under the base case outlook, MP does not project a summer capacity deficit until 2018. Of note, no retirements of MP’s thermal or hydro generation resources are included in the base case L&C balance, although MP’s Preferred Plan is to retire the 75 MW Taconite Harbor 3 unit.

15 16

Docket No. 13-409. Minn. Stat. §216B.241Subdivision 1 and Subd. 1a, respectively.

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MP’s winter peak is typically about 60 MW higher than its summer season peak; therefore, the surplus and deficit outlook is slightly different when shown for the winter season peaks. However, MP notes that the general trends remain the same, as there is very little deficit in the near-term. MP believes its existing generation and planned renewable energy additions, along with economic purchases, can meet the projected needs of its customers for the next several years. During the Company’s IRP completeness review, Staff raised the issue that MP and the Department employ two different methodologies to calculate a planning reserve margin (PRM). For long-term expansion planning evaluations, MP uses the installed capability (ICAP) capacity value. The Department, on the other hand, uses the unforced capacity (UCAP) accreditation to reflect historical forced outage data for MP’s system. 17 In its completeness order, the Commission directed the Company to demonstrate how the use of UCAP would have impacted its base case and preferred plan. 18 MP filed this supplemental information on May 15, 2013. When MP recalculated its base case and Preferred Plan to include the use of UCAP values, “the capacity need was basically the same between the UCAP and ICAP methods,” as shown in the figure below: 19
ICAP represents the maximum generating capacity of a given facility. UCAP represents the amount of ICAP that is actually available at any given time after discounting for time that the facility is unavailable due to outages, such as for repairs. In other words, ICAP times a forced outage rate equals UCAP. MP included a forced outage rate for existing generating resources in its Strategist expansion plan evaluation to ensure the energy production/dispatch for each of its units was accounted for. 18 Commission Order Point #2 in its May 10, 2013 Order. 19 MP Supplemental Filing, May 15, 2013, p. 7.
17

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Action Plan Summary MP’s resource plan addresses two key long-term planning questions. First, what environmental compliance strategies will be utilized to keep its coal-fired generation in compliance with the recently finalized MATS regulations, and second, how will it position its power supply to meet the emerging load growth potential in its service territory. MP’s 2013 IRP builds from the modeling conducted in the Company’s baseload diversification study (BDS). According to MP, “the study itself was necessarily only exploratory and largely provisional.” 20 Unlike the BDS, the IRP 2013 provides the level of information necessary for resource decisions that are in the public interest. Specifically, the plan includes the following Commission requirements from the BDS Order: • A proposal to address the viability of Laskin Energy Center, Units 1 and 2, and Taconite Harbor Energy Center, Unit 3.

MP has identified that Laskin Energy Center (110 MW) and Taconite Harbor 3 (75 MW) are not cost effective to retrofit with additional environmental controls. MP’s 2013 IRP proposes to refuel Laskin Energy Center to a natural gas peaking station and retire Taconite Harbor 3.

20

MP Initial filing, p. 7.

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An evaluation of the consequences – including all relevant costs and the consequences for transmission adequacy – of retiring Boswell Energy Center, Units 1 and 2 by 2020.

MP expects to operate Boswell Energy Center throughout the planning period. • Scenarios that add 100 to 200 MW of wind capacity in the 2014-2016 time frame.

MP has announced plans to construct 200 MW of wind (Bison 4) prior to December 31, 2015. • Scenarios that add 400 to 600 MW of natural gas capacity in the 2014-2016 time frame.

MP concludes from its analysis that a natural gas combined cycle unit is not economic for its customers prior to 2020, largely due to lack of need for the capacity. However, MP expects its next large power supply addition beyond 2020 may be a combined cycle gas plant. • A comprehensive socioeconomic impact analysis by customer class in conformance with the Commission’s resource planning rules.

MP commissioned the University of Minnesota-Duluth to develop a socioeconomic impact study of the full closure of Laskin and Taconite Harbor Energy Centers. This study is provided as Appendix K of MP’s 2013 IRP filing. Table 6 shows MP’s preferred expansion plan with its base assumptions and for a carbon regulation scenario, which applies CO2 prices of $21.50 per ton starting in 2017.

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Both expansion plans are very similar, except the CO2 regulation scenario is more expensive and results in more wind additions. Plan Development MP’s 2013 resource plan consists of a four-step planning evaluation to arrive at the environmental compliance strategy for each facility and to position the Company’s supply for long-term customer requirements. The four sequential steps include: 1. MATS compliance; 2. Retrofit, Refuel, or Retire; 3. Identify a preferred expansion plan; and 4. Conduct a scenario analysis Taken together, MP refers to this process as the Company’s “EnergyForward” strategy. EnergyForward will shift MP’s resource mix to a “one-third, one-third, one-third” balance of coal, natural gas and renewable energy plus conservation. 1. MATS compliance To create its Preferred Plan, MP first determines the requisite MATS compliance measures at its coal-fired generation facilities. MP describes how planning for required controls is modeled in two separate cases: a Base Case EPA scenario that reflects environmental regulations laid out with fairly certain requirements, and an EPA Sensitivity case that reflects environmental measures with a higher level of uncertainty: • The Base Case EPA scenario includes measures that address the MATS, the Industrial Boiler maximum-achievable control technology (MACT) rule, National Ambient Air Quality Standard (NAAQS) revisions, Regional Haze requirements, 316(b) cooling water regulations, the MERA requirements for large coal-fired boilers and Subtitle D NonHazardous waste designation for coal combustion residuals (coal ash). The EPA Sensitivity case includes all measures from the Base Case plus water treatment requirements for Effluent Limitation Guidelines and greenhouse gas regulation on existing sources.

The overall cost for emission control measures, not including any CO2 prices, 21 is summarized in Table 1.
21

The EPA Sensitivity case excludes CO2 costs because this scenario assumes EPA’s greenhouse gas regulation. Therefore, inclusion of CO2 would have been, in effect, double counting CO2.

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Totals shown in Table 1 reflect the environmental controls needed for all the coal fueled units at BEC, LEC, and THEC to satisfy environmental requirements. Of note, Table 1 includes estimated costs for proposed Boswell 4 Retrofit Project, but not expenditures for controls already deployed (e.g. Boswell 3 retrofit under the AREA plan). A majority of MP’s fleet will have some level of requirements under the Base Case EPA scenario and EPA Sensitivity case. Specific to MATS compliance only, the following is a summary unit-by-unit impact for MATS requirements (i.e., mercury, acid gases, and particular matter control): • Boswell 1 and 2. Boswell 1 and 2 can meet MATS requirements by averaging provisions for the overall BEC infrastructure. 22 Through the Boswell 4 Retrofit Project and Boswell 3 AREA investments, MP does not need to further reduce mercury emissions at Boswell 1 and 2. Boswell 3. Because of the emissions controls already installed at Boswell 3 to meet MERA, Boswell 3 does not need to further to reduce mercury for MATS. Boswell 4. The Boswell 4 Retrofit Project before the Commission in Docket 12-920 would also address MATS compliance. Laskin Energy Center Units 1 and 2. To meet MATS requirements, LEC would need to be retrofitted with mercury emission controls, the existing wet particulate control systems would have to be replaced, and other acid gases would need to be controlled. Taconite Harbor Energy Center Units 1 and 2. The environmental upgrades at Taconite Harbor 1 and 2 as part of the AREA Project will meet the mercury emission requirements of MATS. To control acid gases, some changes to the type of sorbent used for SO2 may be necessary. Improved particulate matter control will need to be installed on each unit. Taconite Harbor 3. For the Base Case EPA scenario, MP has identified a multi-pollutant technology alternative for Taconite Harbor 3. This system consists of a dry scrubber for SO2 and acid gases control with activated carbon injection and a fabric filter for mercury and particulate matter control.

• • •

The finalized MATS rule allows a facility with multiple units in the same emissions subcategory to average those emissions across the units to demonstrate compliance with the numerical standards.

22

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Through the first step of its planning evaluation, MATS compliance, MP concludes that BEC, LEC, and THEC are all impacted by the MATS rule. For each of its impacted coal-fired units, MP then evaluated alternatives for retrofit, refueling, and retirement. 2. Retrofit, Refuel, or Retire Strategist compared the cost of required controls for MATS compliance (Step 1) to retiring them altogether (Step 2). The retirement analysis accounts for many categories of costs, including: remaining plant asset balance, decommissioning costs, transmission system and socioeconomic impacts, and replacement generation costs. For BEC and LEC, Strategist included a natural gas refuel option because these facilities have direct access to natural gas distribution. THEC, on the other hand, does not have natural gas pipeline access in close proximity; therefore, the refuel option was not considered for THEC. The results from Step 1 and Step 2 helped MP develop its “Preferred Coal Plan” and included the following decisions: • • • • Boswell 1 and 2: Continue operations on coal Laskin Energy Center: Refuel to natural gas-fired operation in 2015 Taconite Harbor 1 and 2: Retrofit and continue operations on coal Taconite Harbor 3: Shutdown unit in 2015

Boswell 1 and 2 Before conducting the shutdown evaluation, MP evaluated a natural gas refuel option for Boswell 1 and 2. BEC has natural gas supply infrastructure in place, including appropriately sized pipe that could accommodate the operation of Boswell 1 and 2 on natural gas. Boswell 1 and 2 are baseload resources that run a large part of the year, typically at capacity factors of 70 to 80 percent. Because a constant supply of generation is needed, MP’s “production cost analysis” identified units with a low variable cost and high fixed cost (which is common for a baseload generation resource, such as coal generation) to be the most appropriate “type” of resource to meet its system needs provided by Boswell 1 and 2. Figure 13 of MP’s Petition compares the levelized production cost of Boswell 1 and 2 as a coalfired resource (blue curve) versus the natural gas refuel option (red curve). Using a six-year historical average of how Boswell 1 and 2 has been dispatched to meet its system needs, MP finds that continuing Boswell 1 and 2 to run on coal is cost-effective:

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The figure shows that at a capacity factor greater than 40 percent, coal is a lower cost resource at Boswell 1 and 2. MP believes keeping Boswell 1 and 2 as environmentally compliant coal-fired generators serving baseload operations is economical, relative to converting the units to natural gas to meet the MATS requirements. Applying the Commission’s mid-point CO2 value of $21.50/ton starting in 2017, MP’s analysis shows that continuing coal-fired operations Boswell 1 and 2 is still $70 million less expensive than refueling the units over the planning period. MP indicates the option was available for Strategist to retire Boswell 1 and 2, but the retirement option was not economic under any scenario.

Laskin Energy Center As with Boswell 1 and 2, MP evaluated refueling LEC to natural gas before considering as a shutdown alternative. LEC has been dispatched with much less frequency than Boswell 1 and 2 over the past six years, averaging a range of 50 to 60 percent capacity factors. In MP’s production cost analysis, the natural gas refuel and environmental retrofit are extremely close. Figure 14 below identifies that at a 55 percent capacity factor, the two compliance options are essentially equal.

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If the capacity factor at LEC is decreased below its 6-year historical average, the natural gas refuel option is the lower-cost option. MP projects LEC will face additional economic pressure with the emissions controls installed because its operating costs will increase. Thus, MP believes it is likely that capacity factors would decrease from its present level in future years, and LEC will operate more like an intermediate or peaking resource than a baseload unit. Refueling LEC to operate on natural gas is cost-effective with and without the application of CO2 values. MP believes LEC can be optimized as a natural gas peaking unit with wind or the regional market replacing its energy. Another benefit MP identified with the LEC refuel is significantly lower emission rates. As Table 4 below shows, MP projects the conversion to natural gas at LEC will result in an average reduction in emission rates of 78 percent across all pollutants:

However, converting LEC to natural gas creates system-wide operational changes. The increase in delivered fuel cost at LEC when converted to natural gas is expected to significantly decrease

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the capacity factor at the facility when compared to where it has typically operated on coal. MP expects LEC will operate like a peaking resource, with an expected capacity factor of 27 percent. MP’s retirement analysis finds that refueling LEC is more cost-effective than retiring it. LEC has an original installed cost of $79 million, and a remaining plant balance of approximately $29 million as of December 31, 2012. While some assets will be retired after the refuel ($5 million of the $29 million will be retired assets), most are expected to still be used. According to MP: 23 The benefit of utilizing a depreciated asset (LEC) in a reduced role is more cost effective than building a new and more efficient natural gas-fired resource. Additional energy can be supplied through a new wind project or the market to offset the lost energy production at LEC. Additionally, MP highlights the socioeconomic impacts of LEC retirement. While not included as a direct cost to the LEC shutdown alternative, MP and the University of Minnesota-Duluth partnered to evaluate the the socioeconomic impact of a facility closure (Appendix K of MP’s Petition). According to the socioeconomic impact analysis, significant benefits exist to the communities and surrounding region through tax payments, employment and vendor utilization. If MP retires LEC, 41 jobs would be lost, and the associated support roles throughout the region would create a 2 percent increase in unemployment almost immediately for the area. An average of $10 million would be lost in revenue each year for the area economy after the closure.

Taconite Harbor Energy Center According to MP’s MATS compliance screening, Taconite Harbor 1 and 2 require incremental emissions controls to reduce SO2 and particulate matter beyond that which was reduced as part of the Company’s AREA project. Taconite Harbor 3 would require a much more substantial investment, a $60 million multi-pollutant investment to reduce SO2, mercury, acid gases, and particular matter to meet MATS requirements. 24 MP states that all THEC units operate at capacity factors of 60 to 75 percent on an annual basis. While Taconite Harbor 1 and 2 are well-positioned to meet MATS, Strategist dispatches them less because of the additional operating costs incurred by the requisite sorbent injection. Still, the decreased capacity factor is far less impactful to the system than the LEC refuel, as shown in Appendix I of MP’s filing:

MP Petition, Appendix I, p. 11. Burns & McDonnell, Hitachi Power Systems of America, and MP developed preliminary designs and cost estimates for the installation of the pollution control systems and equipment at Taconite Harbor 3. The components of the approximately $60 million project are summarized in Appendix M of MP’s resource plan.
24

23

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Since no additional capital investment is required at Taconite Harbor 1 and 2 to meet MATS – the additional sorbents reflect an operational cost – MP concludes that continuing the units to operate on coal is preferable to retiring them. MP’s analysis indicates that Taconite Harbor 1 and 2 should be considered for shutdown once a CO2 value is factored into the model. MP tested mid- ($21/ton in 2017), low- ($9), and highsensitivity ($34) CO2 prices. According to MP’s analysis, Taconite Harbor 1 and 2 are not retired in the low sensitivity, but the units are retired in 2017 at the mid- and high-level CO2 prices. MP has identified that the $60 million investment in retrofit technology for Taconite Harbor 3 is not in the best interest of its customers. MP’s retirement analysis shows retrofitting Taconite Harbor 3 has a cost premium with or without carbon prices. MP believes retiring Taconite Harbor 3 also avoids the risk of wasted capital investment required for MATS compliance should carbon regulation materialize in the near future. MP will “cease coal operation” at Taconite Harbor 3 before the April 2015 MATS compliance deadline. The physical equipment at the unit will be used for the operations of the facility as a whole. MP will submit an Attachment Y with MISO in 2013 to confirm no additional regional transmission considerations will be needed before 2015. THEC units 1, 2, and 3 have an original installed cost of $147 million, and a remaining plant balance of approximately $105 million (as of December 31, 2012). Of this total, approximately $15 million in net remaining plant balance for Taconite Harbor 3 are expected to be retired. 3. Identify a Preferred Expansion Plan Once MP determines the impacts of EPA rules (Step 1) and runs those impacts in Strategist to determine its preferred coal plan (Step 2), MP’s third step is developing its expansion plan. The Company’s base case expansion plan (i.e. the “Preferred Plan) therefore assumes: • • • • BEC will continue to operate on coal throughout the planning period; LEC will dispatch as a natural-gas fired peaking resource starting in 2015; Taconite Harbor 1 and 2 will operate on coal throughout the planning period, although at a slightly less capacity factor due to increased operating costs; and Taconite Harbor 3 will be removed from the system in April 2015.

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Since Taconite Harbor 3 is removed in the base case expansion plan, MP has 75 MW less capacity available. Thus, the starting point for the expansion planning (Step 3) is shown in Figure 17 of MP’s Petition:

Without Taconite Harbor 3, MP’s capacity deficit incrementally increases from approximately 50 MW in 2015, up to roughly 100 MW until 2020. At this point, a 250 MW PPA with Manitoba Hydro is used to meet MP’s capacity and energy deficit starting in 2020. In the long-term (post-2020), MP’s expansion plan demonstrates that a partial ownership share in a larger natural gas combined cycle facility is likely to be the Company’s next resource addition, other than renewables and DSM. 4. Scenario Analysis MP ran four scenarios, each with 22 sensitivities: • Preferred Plan, which retires Taconite Harbor 3 and refuels Laskin; • Preferred Coal with THEC Shutdown, which retires Taconite Harbor 1, 2, and 3, and refuels Laskin; • Small Coal Retrofit, which does not retire any coal, but retrofits to comply with MATS (Mercury and Air Toxics Standards); and • MATS Shutdown, which retires Taconite Harbor 1, 2, and 3 and Laskin Energy Center. Table 11 below shows the Preferred Plan is cost-effective under base case conditions, and in 12 of the 22 sensitivities. (The green shaded area represents the plan with the lowest cost.)

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Observations Common to Most Plans: • A 105 MW ND wind unit is added across all plans, reflecting the benefit of the wind Production Tax Credit. • All plans utilize some amount of short term bilateral bridge purchase or market capacity purchases; • With the exception of the Retrofit Small Coal Plan, the next generation resource alternative added (other than wind) is a 200 MW share of a combined cycle facility, reflecting the need for additional baseload/intermediate generation. Observations for “Preferred Plan”: • Short term bilateral bridge purchases allow MP to delay further investment in new generation resources until beyond 2020 when a 200 MW share of a combined cycle resource is added. • The Preferred Plan retires Taconite Harbor 3, but not THEC 1 and 2. Observations for the “Preferred Plan with THEC Station Shutdown” Plan: • The retirement of Taconite Harbor 1 and 2, in addition to Unit 3, triggers the need for a 200 MW share of a combined cycle resource in 2017. • In addition to the short term generation need, an additional combustion turbine is added in 2024. Observations for “Retrofit Small Coal” Plan: • Maintaining operations at existing generation fleet delays need for a new generation resource until 2025.

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With wind additions and the retrofit of MP’s small coal units, baseload/intermediate generation needs are met through the planning period. A simple cycle combustion turbine (a peaking resource) is the next generation resource.

Observations for “MATS Shutdown” Plan: • 300 MW of coal-fired generation is retired in 2015. The bilateral bridge purchase allows MP to delay investment in a new resource until 2017 when a combined cycle resource is available. • 2017 is the earliest year that a combined cycle resource is available. If a bilateral bridge purchase is not available at the capacity and prices assumed, it could have adverse cost impacts to MP’s customers in the short term.

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Party Positions
Departments of Commerce The Department recommends the Commission approve and modify MP’s resource plan. DOC recommends the Commission require MP to: • • Add about 200 MW of intermediate capacity in the 2015-2017 time frame, as long as the resource is reasonably priced; and procure energy savings equal to 1.87 percent of retail sales;

The Department also recommends the Commission require MP to retire or sell Taconite Harbor 3 by 2015, switch the fuel of Laskin units 1 and 2 to natural gas by 2015, and add 100-200 MW of wind in 2014-2016. The Commission can decide whether or not findings on these actions are necessary because they are consistent with MP’s proposed action plan.

Modeling Review DOC’s first step in evaluating utilities’ modeling in resource plans is to replicate how a utility arrives at its proposed expansion plan. The Department obtained from MP the Company’s base case, the Strategist commands necessary re-create the base case and each of the scenarios and contingencies explored by the Company. After replicating MP’s model, DOC made changes to the baseline assumptions to establish the Department’s own base case. The Department’s base case includes the following changes to MP’s base case: • MISO’s PRMUCAP accredited capacity and reserve ratios were implemented; • MP’s forecast of the cost of NOX emissions credits was added; • MP’s forecast of the cost of SO2 emissions credits was added; • DOC deleted MP’s expansion wind unit and replaced it with an optional wind unit; • DOC added an estimate of transmission costs to the Taconite Harbor 1 and 2 retirement analysis. Table 8 of the Department’s comments provides the unit additions and retirements in DOC’s base case:

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As shown in Table 8, DOC’s base case expansion plan adds 200 MW of wind through 2016 and an intermediate unit in 2015. These additions coincide with retiring Taconite Harbor 3 in 2015. The Department’s base case also retires Taconite Harbor 1 and 2 in 2017. In its place, another 100 MW wind unit is added in 2018, and a one-year, 50 MW intermediate PPA is added in 2017. After 2019, no expansion units are selected until 2024.

Trends in the Expansion Plans Once a base case is created, the Department stresses the base case with “contingencies” (MP uses the term “sensitivities”). DOC ran 31 different contingencies to test how variations in carbon values, fuel prices, and the energy and demand forecast changes the expansion plan. The purpose for running so many contingencies is because a change in one contingency may or may not affect the selection of resources in Strategist’s outputs. Therefore, acknowledging a 15year planning period will inevitably result in unforeseen changes, the Department relies on trends across the range of values when making recommendations. DOC also looks at how sensitive the Strategist model is to changing the assumptions in order to measure ratepayers’ exposure to volatility and risk. For example, since MP presently relies heavily on coal and minimally on natural gas for its generation, the Department can assess whether small increases in coal prices pose a greater risk than large increases in natural gas prices. Because the Department makes recommendations on trends, overall system impacts, and its judgment of the best resource plan, its base case results may or may not be DOC’s recommended plan. In this instance, the top ten plans (in terms of those with the least societal costs) have

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similar results in the near-term. Because the Department’s long-term results are not as conclusive, DOC does not make any recommendations regarding long-term unit additions. The same three, 100 MW each, wind additions (shown in Table 8 above) were chosen in all of the ten least-cost plans. Moreover, all ten plans selected a 200 MW intermediate unit in 2015. The only other two expansion units from Table 8 include a 50 MW PPA in 2019 and another 200 MW intermediate unit in 2024. The selection of these two units has more mixed results. According to the Strategist results: • • The one-year, 50 MW intermediate PPA was selected in 2019 in four plans and not selected in six plans. The second 200 MW intermediate unit was selected in 2024 in three plans, but in other plans it was changed to a peaking unit.

The Department makes no recommendations on the 2019 and 2024 unit additions because the results are inconclusive and the additions are far enough into the future that they can be evaluated in MP’s next resource plan. According to the Department: The initial wind units and the 2015 intermediate unit are consistently selected. Beyond that, additional capacity is typically selected, but Strategist toggles between peaking and intermediate units. Given that inconsistent results occur further in the future and the fact that these resources are dependent upon the quantity of retirements ordered by the Commission, these issues can be further evaluated in MP’s next IRP. The Department recommends that the Commission require MP to obtain the intermediate capacity (and associated energy) in 2015. The Department notes that MP could pursue this addition by constructing the resource itself, sharing in the ownership of the resource, or by procuring the resource through bilateral contracts, whichever option is most cost-effective.

Scenario Analysis Including the base case, the Department ran a total of 15 different scenarios. A scenario is different from a contingency because a scenario can restrict Strategist from choosing a particular resource, force Strategist to consider a particular resource, or force certain amounts of resources (e.g. variations of DSM). The contingencies test how different circumstances affect each scenario. For MP’s resource plan, the Department ran scenarios evaluating three levels of market availability: Full Market (MP’s design), Limited Market (less energy, no capacity), and No Market. Additional scenarios include various levels market reliance with and without CO2 costs.

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As MP relies on the market less, and as the scenarios change from the Full Market to Limited Market to No Market, the Department’s modeling results show the following trends: 1. More wind units are added as less energy is drawn from the market; 2. The number of intermediate units added increases; 3. There are almost no contingencies that select peaking units when the spot market is turned off. On the other hand, virtually every contingency selects peaking units when the full spot market is available. The availability of the wholesale market also has implications for the retirement analysis. Table 10 from the Department’s comment shows the expansion plans under the three market availability scenarios, with and without CO2 costs:

The Limited Market, With CO2 Costs scenario in Table 10 mirrors the Department’s base case expansion plan. In this scenario, two intermediate natural gas units and 300 MW of wind are added. Taconite Harbor 3 is retired in 2015, and Taconite Harbor 1 and 2 are retired in 2017. Without CO2 costs, only Taconite Harbor 3 is retired in the Limited Market scenario. In the Full Market, Without CO2 Costs scenario in Table 10 (the box in the upper right corner), Strategist is allowed to consider the wholesale market to an unlimited extent. The Department used MP’s assumptions for wholesale prices. Under these conditions, none of the Taconite Harbor units are retired, and instead Laskin Energy Center is retired because spot market energy and capacity is preferable to refueling Laskin with natural gas, in terms of cost.

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The Department believes MP’s Full Market availability is unreasonable and could lead to MP’s customers facing significantly higher costs than MP assumes in its analysis. There could also be reliability issues if the spot market capacity selected by the model is simply not available. The Department concludes that some form of future CO2 cost needs to be considered by the Commission when it deliberates about what resource plan to approve. If the Commission does not choose to consider restrictions on the wholesale market or CO2 costs, the Department’s modeling suggests that closing Taconite Harbor 3 is not cost-effective. Moreover, refueling Laskin Energy Center to operate on natural gas is also not cost-effective if CO2 costs are not considered, and MP’s modeling can choose the option to rely on the wholesale market instead.

Retirement Analysis It is important to note that the Department’s base case expansion plan retires Taconite Harbor 1 and 2, but the Department does not recommend this action to the Commission at this time. Table 10 on the previous page shows that retirement of all three units at Taconite Harbor is generally the least cost plan in scenarios that include the mid-point of the Commission’s CO2 costs. However, the matter at hand is not whether two plans are close in cost, but which actions represent the best resource plan. For example, the Department does not believe MP should rely excessively on the MISO energy market, especially at a time when wholesale energy is expected to become more scarce as a result of regional retirements. DOC recommends a plan that retires only Taconite Harbor unit 3 in part because the Department focused upon the low CO2 cost contingencies and the scenarios with limited reliance on the wholesale market. In the ten least cost plans the Department modeled, the following trends exist for retirement dates: • • • • Boswell units 1 and 2 were not selected for retirement in any of the ten plans; Taconite Harbor unit 3 was retired in 2015 in eight of the plans and not retired in two plans; Taconite Harbor units 1 and 2 were retired in 2016-2017 in six plans, retired in 2020 in three plans, and not retired once; and Laskin units 1 and 2 were retired in 2024 in three plans, before 2020 in one plan, and not retired in six plans.

Rapids Energy Center

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The Department ran two scenarios (one with CO2 costs, one without) that shut down Rapids to test its cost effectiveness. The Department’s modeling indicates retiring Rapids decreases MP’s system cost by about $5 million when CO2 costs are included and by about $11.7 million when CO2 costs are not included. DOC’s results are highly sensitive to several contingencies, although retiring Rapids is economic in several instances. MP did not include the cost to shut down the Rapids unit. The Department recommended in their initial comments that MP run a Rapids retirement scenario, but MP responded: Minnesota Power currently has before the Commission a Petition to request that Rapids be moved to the Company’s regulated rate base in order to provide valuable and flexible renewable biomass energy to its customers. Because several aspects of Rapids’ and Blandin’s operations are interdependent, a shutdown evaluation of Rapids would require that the Blandin paper mill also be shut down as it requires steam from Rapids to operate. The implications of a shutdown of this magnitude in Minnesota would bring significant job losses and costs that have not been contemplated to date. Minnesota Power does not believe it is appropriate or advisable to model removing Rapids from its system. The Department recommends that MP perform the analysis such that the Commission has the proper record to base a decision upon whether to keep Rapids in operation or retire it altogether.

DSM Scenarios The Department modeled additional conservation scenarios incremental to that which is embedded in MP’s forecast. The Department generally assumes that the amount of energy savings built into the forecast is an average of the last five years of energy savings. Table 12 below shows the energy savings that MP achieved from 2007 to 2011.

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Staff circled in red the amount of energy savings which DOC assumes is included in the forecast. From 2007-2011, MP saved an average of approximately 55.1 million kWh per year, which represents 1.67 percent of retail sales net CIP opt-out customers. Five-year savings for MP’s total energy sales to retail customers (i.e., including CIP opt-out customers) is 0.65 percent. DOC Information Request #16 asked MP to conduct two additional DSM sensitivities assuming achievement of energy savings equal to 1.7 percent and 2.0 percent of retail sales (excluding optout customers). MP responded by modeling the impact of increasing energy conservation beyond amounts already embedded in its forecast embedded amounts by 0.2 percent and 0.5 percent. According to the Company: Minnesota Power ran the two requested additional sensitivities in the Strategist model with conservation savings goal increased to 1.7 percent and 2.0 percent. With 1.5 percent conservation savings already built into the energy sales forecast, the incremental increase in conservation of 0.2 percent and 0.5 percent was modeled as a new conservation program in the Strategist model for the Preferred Plan and the three alternative swim lanes. The cost to implement conservation programs that would achieve an incremental increase in conservation of 0.2 percent and 0.5 percent was assumed to be zero for this sensitivity, giving the programs the most benefit possible. With no cost attributed to the incremental increase in conservation, the change in power supply cost with the incremental increase in conservation represents the avoided cost these programs could bring to the customer. MP calculated the benefit from the incremental conservation would be in the form of decreased power supply costs. However, MP did not calculate any program costs to determine whether these DSM scenarios would be cost-effective. Because MP did not include any costs for the incremental conservation achievement, the Department assumed the potential CIP budget for the incremental conservation achievement as the cost for conservation. This cost for conservation was compared against the decreased power supply costs MP estimated. The Department’s analysis indicates that an additional 0.2 percent of energy savings may be cost-effective. Currently, the Commission-approved Shared Savings DSM financial incentive mechanism encourages MP to maximize its savings, and the Company is on a path to achieve the higher energy savings represented by the incremental 0.2 percent energy savings scenario. The 0.2 percent additional DSM does not change the Department’s preferred expansion path, (i.e., the supply-side resources needed do not change). Thus, the Commission could approve the higher energy savings amount without concern that MP could face a reliability problem if the Company did not achieve the energy savings over the long term.

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Currently, the Department estimates that energy savings equal to 1.67 percent of retail sales is embedded in MP’s forecast. The additional 0.2 percent of retail sales to non-opt-out customers results in energy savings of 1.87 percent (1.67 percent of embedded conservation plus 0.2 percent of incremental energy savings). The Department recommends that the Commission approve an IRP energy savings goal of 1.87 percent of retail sales. Environmental Intervenors The Environmental Intervenors (EIs) consist of the Izaak Walton League, Fresh Energy, the Sierra Club, and the Minnesota Center for Environmental Advocacy. The EIs’ comments address two main categories of MP’s resource plan, the Company’s Strategist modeling and its energy efficiency potential. The two categories are separately addressed because energy efficiency’s relationship to the Strategist model exists only to the extent that it is embedded in MP’s load forecast. However, the EIs urge the Commission to require MP to evaluate additional energy savings, especially for the vast majority of MP’s load which is CIP-exempt. 1. Modeling comments A. The Commission should modify MP’s expansion plan to initiate the process of retiring all three coal units at Taconite Harbor by 2017. The Department’s modeling shows that retiring Taconite Harbor 1 and 2 is cost-effective in most contingencies which consider CO2 costs. The EIs recommend the Commission consider these results when approving the appropriate resource plan. The EIs believe there is significant CO2 regulatory risk exposed to MP’s customers, and retirement of its aging small coal units reflects the least risky course of action. B. MP overstates the performance of its existing coal fleet The EIs observe that MP’s modeling demonstrates minimal cost differences for its preferred coal plan versus non-coal alternatives. This result is in spite of MP’s overstated performance of its existing coal fleet. As shown on page 28 of this document (and discussed in Appendix I of MP’s Petition), MP expects little change in the capacity factor of Taconite Harbor 1 and 2 as a result of MATS compliance. MP’s base case assumes the units will be dispatched at a 59 percent capacity factor, and once MATS compliant, Strategist dispatches the unit at a 57 percent capacity factor. Boswell 1 and 2 have an expected dispatch range of 70-80 percent over the planning period. The EIs contend that since THEC 1 and 2 and Boswell 1 and 2 are over 50 years old, it is unreasonable for MP to assume historical operational performance during the planning period. To the contrary, MP’s older coal units will incur higher operating costs and declining performance over time. Therefore, the EIs do not believe Strategist can provide an optimal

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resource plan because it dispatches MP’s existing coal units far more than which can reasonably be expected. Even with MP’s model set up as it is, retiring Taconite Harbor 1 and 2 appears to be the least cost plan when CO2 is considered. In addition to the CO2 regulatory risk, MP’s modeling overstates the benefit and understates the cost of Taconite Harbor 1 and 2. Thus, the EIs believe the Commission should pursue retirement of these units by 2017. Likewise, the assumed dispatch cost of Boswell 1 and 2 does fully capture its actual variable operation and maintenance costs. This causes Boswell 1 and 2 to be dispatched more frequently, thereby improving its relative benefit to other alternatives, such as a natural gas combined cycle option. Such modeling deficiencies restrict Strategist from selecting an optimal resource plan. The EIs disagree that MP has appropriately considered a natural gas alternative at BEC and believe the Commission should consider refueling Boswell 1 and 2 on natural gas as a costeffective option. C. MP’s resource plan is incomplete MP’s modeling assumes a future Commission decision approving the Company’s Boswell 4 Retrofit Petition and does not reconcile differing IRP assumptions with modeling in the Boswell 4 docket. Since the Commission has not decided on MP’s proposal to retrofit the unit in Docket 12-920, the Company should not assume that Boswell 4 will be fully retrofitted as proposed and continue to operate on coal through 2034. Similarly, the modeling from the Boswell 4 Retrofit Petition assumes that Laskin 1 & 2 and Taconite Harbor 3 continue to operate on coal through 2034. Therefore, MP’s analysis is not complete and does not evaluate MP’s system under retirement of multiple units, including Boswell 4. Consequently, the Commission does not have a complete picture of the options available. Additionally, MP’s Boswell 4 Retrofit Project does not include a least cost plan that meets 50 percent and 75 percent of the power generated by Boswell 4 through energy conservation and renewable energy resources. 25

2. MP should capture higher levels of energy efficiency The EIs recommend the Commission modify MP’s action plan to incorporate more cost-effective energy conservation than the proposed savings in MP’s plan. Overall, the EIs do not believe MP’s resource plan reflects the energy policy of the state of Minnesota. On May 16, 2013, Governor Dayton signed H.F. 729 into law. Article 12, Section 2,
Minn. Stat. § 216B.2422, Subd. 2, requires Minnesota Power to "include the least cost plan for meeting 50 and 75 percent of all new and refurbished capacity needs through a combination of conservation and renewable energy resources." In turn, Minn. Stat. §216B.2422, Subd. l(e) states that "refurbish" means "to rebuild or substantially modify an existing electricity generating resource of 30 megawatts or greater."
25

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amends Minn. Stat. § 216B.2401 so that it now states: “it is the energy policy of the state of Minnesota to achieve annual energy savings equal to at least 1.5 percent of annual retail energy sales of electricity.” H.F. 729 states: “The legislature finds that energy savings are an energy resource, and that cost-effective energy savings are preferred over all other energy resources.” 26 The EIs argue that a failure to capture cost-effective energy savings potential is contrary to the State’s new energy policy goals. MP’s large industrial customers have historically been exempt from CIP such that the requirements and impacts of the CIP program do not affect more than half of MP’s sales. Accordingly, MP bases its achievement of the state’s 1.5 percent annual energy conservation goal on its total energy sales less those sales made to exempt customers. Due to legislative action this session, the EIs believe MP must amend its IRP to evaluate how this new statutory requirement by will change the conservation efforts of its large industrial customers, and MP’s consideration of industrial savings potential. At present, the IRP does not expressly consider improvements in industrial customer energy efficiency as a resource to meet load requirements. Given that MP’s sales to industrial customers are such a large percentage of its total sales, costeffective conservation in this sector should be directly considered in resource planning. The potential for significant industrial sector energy and capacity savings can avoid the need for supply-side resources that MP has proposed to include in its IRP. The EIs believe self-directed programs from MP’s large industrial customers to achieve energy savings can be measured and verified. That these customers self-direct their own funds to energy efficiency investments does not mean that their efforts should be irrelevant to MP’s planning. Therefore, as part of its compliance with existing and new state energy efficiency policy, the EIs recommend that MP should report yearly data on the aggregate energy and peak demand savings realized by CIP-exempt customers. Because MP’s total load is so heavily influenced by a small number of large users, an IRP that lacks any meaningful consideration of energy savings from these customers provides neither a complete understanding nor comprehensive analysis of future resource needs, and is therefore inadequate.

Large Power Intervenors The Large Power Intervenors (LPI) consist of of ArcelorMittal USA (Minorca Mine); UPMBlandin Paper Company; Boise, Inc.; Enbridge Energy, Limited Partnership; Hibbing Taconite Company; Mesabi Nugget Delaware, LLC; NewPage Corporation; PolyMet Mining, Inc.; Sappi Cloquet, LLC; USG Interiors, LLC; United States Steel Corporation (Keewatin Taconite and Minntac Mine); and United Taconite, LLC.

26

H.F. 729, Art. 12, Sec. 2.

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MP’s system needs require continuing its coal units’ operation LPI recommends the Commission find that MP’s “Retrofit Small Coal” plan is in the ratepayers’ best interest. LPI urges the Commission to reject any suggestion that clear answers exist from total reliance on the Strategist model and consider the assumptions which underlie the parties’ recommendations. 1. MP’s proposed plan exposes ratepayers to greater fuel cost risk MP’s Retrofit Small Coal option is less risky from a fuel cost perspective because coal prices are more stable than natural gas. In addition to potentially exposing ratepayers to the risk of variability in the wholesale market for electricity, MP’s Preferred Plan exposes ratepayers to volatility in the market for natural gas. LPI believes ratepayers are entitled to some level of protection given MP’s lack of experience in procuring natural gas. More than 50 percent of MP’s load can be attributed to large, energy-intensive industrial customers that are highly sensitive to energy price increases. If the Commission rejects LPI’s proposal to adopt MP’s Retrofit Small Coal plan and approves the conversion of LEC to natural gas, then LPI requests that the Commission require MP to develop and implement a natural gas risk management plan that protects ratepayers from spikes in natural gas prices. Such a risk management plan (e.g., a ceiling price on natural gas purchases) could be developed in connection with the ongoing Annual Automatic Adjustment docket. 27 2. Converting Laskin Energy Center a peaking natural gas resource could threaten reliability MP’s response to LPI Information Request No. 213 states that LEC “will likely only run in extreme pricing and reliability scenarios on the power system.” LPI believes the resource plan does not adequately contemplate how MP will operationally manage the reduction in output from LEC after the conversion to natural gas. Assuming MP replaces LEC with additional wind and bilateral purchase agreements, LPI contends that MP has not provided a reliable substitute for an existing baseload unit. Moreover, doing so would further subject MP customers to greater risk from wholesale market price volatility and wind intermittency issues. LPI is concerned that MP may at a later date request approval of additional capital costs to increase the output of the newly refueled gas generators to make up for generation shortfall on the system. Higher than expected infrastructure improvement costs and additional long-term investments could be required to increase the output of LEC after the conversion is completed. At this point, LPI believes the resource plan does not appropriately contemplate the baseload needs of the Company. The $14 million that MP states would be required to refuel LEC does not include the actual cost to maintain the system’s continuous need for generation. The majority of MP’s capacity and energy is used by its large industrial customers in the mining and paper industries, leading to an average system load factor of approximately 80 percent, which is unique in the utility industry. LPI requests the Commission consider the operational characteristics of the system and the limitations of converting baseload units to peaking units.
27

In the Matter of the 2011-2012 Annual Automatic Adjustment Reports, Docket No. E999/AA-12-757.

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3. Externality assumptions unreasonably sway the modeling results LPI believes that the base case should be modeled without such externality values (i.e., setting the values to zero) and sensitivity runs should be conducted solely to assess the impact of those externalities. Externalities are not built into rates, and the Commission should consider the resource plan which results in the lowest rates. LPI Information Request No. 307 requested MP to add another swim lane which retrofits LEC with pollution controls and assumes a zero value to externality costs. (The green shaded areas represent the least-cost plan.)

Based on MP’s response, by removing the externalities, the present value revenue requirement of MP’s Preferred Plan is reduced by $350 million. Additionally, the Retrofit Small Coal option goes from being the least-cost option in four plans to being the least cost option in twelve plans. MP’s Preferred Plan drops from being least-cost in twelve plans to six plans. One notable sensitivity analysis that shifts the least cost plan to the Preferred Plan or Preferred Plan with THEC shutdown is the carbon sensitivity analysis. Monetizing CO2 in the analysis has material impacts and can significantly alter retirement decisions. Since MP’s decisions about retiring units are sensitive to CO2 cost assumptions, LPI believes it is crucial that the Commission carefully weigh the merits of these assumptions. Basing expensive resource decisions on speculative assumptions is a very risky proposition.

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Comments on Energy Efficiency, CIP, and H.F. 729 Article 12, Section 2 of H.F. 729 made the following revisions to section 216B.2401 (underline indicates new language; strikethrough indicates deletions): 216B.2401 ENERGY CONSERVATION SAVINGS POLICY GOAL. The legislature finds that energy savings are an energy resource, and that cost-effective energy savings are preferred over all other energy resources. The legislature further finds that cost-effective energy savings should be procured systematically and aggressively in order to reduce utility costs for businesses and residents, improve the competitiveness and profitability of businesses, create more energy-related jobs, reduce the economic burden of fuel imports, and reduce pollution and emissions that cause climate change. Therefore, it is the energy policy of the state of Minnesota to achieve annual energy savings equal to at least 1.5 percent of annual retail energy sales of electricity and natural gas directly through cost-effective energy conservation improvement programs and rate design, and indirectly through energy efficiency achieved by energy consumers without direct utility involvement, energy codes and appliance standards, programs designed to transform the market or change consumer behavior, energy savings resulting from efficiency improvements to the utility infrastructure and system, and other efforts to promote energy efficiency and energy conservation. In addition, Article 12, Section 3 of H.F. 729 amended Minn. Stat. § 216C.05, Subd. 2 as follows: Subd. 2. Energy policy goals. It is the energy policy of the state of Minnesota that: (1) annual energy savings equal to at least 1.5 percent of annual retail energy sales of electricity and natural gas be achieved through cost-effective energy efficiency; (1)(2) the per capita use of fossil fuel as an energy input be reduced by 15 percent by the year 2015, through increased reliance on energy efficiency and renewable energy alternatives; and (2)(3) 25 percent of the total energy used in the state be derived from renewable energy resources by the year 2025. LPI argues that H.F. 729 does not create new conservation mandates. Similarly, the state’s policy goal of achieving energy savings equal to 1.5 percent of annual retail energy sales was not changed in any meaningful respect. While the addition of “at least” suggests that 1.5 percent

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should be a floor and not a ceiling, it does not change the fundamental goal that each utility should work to achieve a reduction in system load of 1.5 percent per year. According to LPI, the legislature’s addition of “energy efficiency achieved by energy consumers without direct utility involvement” is most likely an additional mechanism to achieve savings, but it is not an obligation. The language recognizes system-wide savings that are occurring through the efforts of retail customers outside of any utility-sponsored program and to allow the utilities to count these savings toward the 1.5 percent goal. In other words, the new language permits utilities to take credit for energy savings achieved by retail users that are not benefitting from CIP. LPI believes that requiring utilities to take the energy conservation efforts of CIP-exempt customers into account during the resource planning process would place an undue burden on the utilities and would place the Commission in an inappropriate regulatory position. To require MP to take the energy conservation efforts of CIP-exempt customers into account based on the mundane statutory changes in H.F. 729 would effectively undo the CIP exemption and put utilities in the undesirable position of collecting and reporting data that should be afforded protection from disclosure to the public.

Comments on Rate Impacts of Transmission Investments LPI does not believe MP’s plan sufficiently assesses the rate impacts of its transmission investments. While the Great Northern Transmission Line will not be placed in service until 2020, Minnesota Power’s short-term action plan includes initiating the Certificate of Need in 2013. Assuming the Certificate of Need is approved, customers may bear CWIP-related costs in the 2013-2017 timeframe that should be included in the rate impact analysis. Moreover, LPI identifies several MISO Transmission Expansion Plan (MTEP) lines that were excluded from MP’s rate impact evaluation.

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Non-Party Comments
Schroeder Township On March 18, 2013, the Schroeder Township filed the following letter with the Commission: At the Annual Meeting of Schroeder Township, Cook County, Minnesota, held on March 12, 2013 the voters present unanimously passed the following resolution: Therefore be it resolved that the Voters at the March 12, 2013 Schroeder Township Annual Meeting do fully support Minnesota Power’s EnergyForward strategy and the recommendations outlined in the Integrated Resource Plan filing. We strongly support Minnesota Power’s plan to keep Units 1 and 2 operational at Taconite Harbor Energy Center while complying with all EPA and Minnesota State Pollution Standards.” Similarly, the Cook County Board of Commissioners unanimously voted to support MP’s resource plan, and filed this motion in the record. Town of Tofte On March 20, 2013, the Town of Tofte filed a motion supporting MP’s 2013 IRP: The board of Tofte Supervisors at the March 14, 2013, town meeting does herby resolve that we support Minnesota Power’s Energy Forward strategy and the recommendations outlined in the Integrated Resource Plan filing. We strongly support Minnesota Power’s plan to keep Units 1 and 2 operational at Taconite Harbor Energy Center.” City of Aurora On April 12, 2013, also filed a resolution in support of MP’s resource plan: THEREFORE BE IT RESOLVED, that the City of Aurora does hereby resolve that we support Minnesota Power's EnergyForward strategy and the recommendations outlined in the Integrated Resource Plan filing. We strongly support Minnesota Power's plan to refuel the Laskin Energy Center to become its first natural gas plant. Public Comments The PUC received 441 letters from the public asking the Commission to replace MP’s existing coal facilities with cleaner sources of energy. Additionally, Conservation Minnesota submitted a petition with several signatures from members of the public to replace MP’s coal units.

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Staff Analysis
The Commission’s role in integrated resource plans is defined in Section 216B.2422 of Minnesota Statutes and Chapter 7843 of Minnesota Rules. Minn. Stat. 216B.2422, Subd. 2., states that the Commission shall approve, reject, or modify a utility’s resource plan, consistent with the public interest. The Department recommends the Commission approve MP’s resource plan with modifications. The EIs recommend the Commission modify MP’s proposal to include higher levels of DSM and more aggressive carbon emissions reductions. LPI recommends the Commission direct MP to adopt the “Retrofit Small Coal” scenario. In previous IRP orders, the Commission has issued its decision among four categories of options: 1. Approval of the resource plan; 2. Findings of fact and conclusions on the utility’s proposed resource plan and the alternative resource plans; and 3. Whether compliance filings (e.g. a baseload diversification study) are a necessary condition of the Commission’s approval; and 4. Requirements for the utility’s next resource plan The decision options on page 63 of this document are categorized to follow these four steps. Therefore, the Commission can define its own scope of this IRP as it considers whether to approve MP’s plan as a whole, or whether further findings would be beneficial to the record. If the Commission believes additional information is necessary, the Commission can require MP to make compliance filings to this record or require MP to address issues with more detail in the Company’s next IRP.

1. Approval Due to the inherent uncertainty in resource planning, the Commission has typically focused its ordering points on the five-year (or roughly five-year) action plan. As shown in the table below, there is considerable consensus in the five-year action plan between MP’s Preferred Plan and the Department’s recommendations.

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MP’s Preferred Plan
Retire Taconite Harbor 3 by April 2015 to comply with EPA’s MATS rule. Convert Laskin Energy Center to a natural gas peaking station by 2015 On March 4, 2013, MP issued a wind RFP seeking up to 200 MW of wind generation, with commercial operation prior to December 31, 2015 (this action resulted in Bison 4). Pursue 50 MW bilateral market purchases until a natural gas combined cycle unit can be added after 2020 Continue to pursue energy savings equaling 1.5 percent of retail sales of customers that have not opted out of CIP

DOC Recommendations
Retire or sell Taconite Harbor 3 so the unit is removed from MP’s system by no later than the end of 2015 Switch the fuel of Laskin units 1 and 2 to natural gas by 2015 Add 100 to 200 MW of wind capacity in the 20142016 time frame as long as the resource is reasonably priced Add about 200 MW of intermediate capacity in the 2015-2017 time frame as long as the resource is reasonably priced Procure energy savings equal to 1.87 percent of retail sales.

The Commission can approve MP’s resource plan for planning purposes only. MP notes that its Strategist simulations are not robust enough to dictate the ultimate retirement planning decision for a generating asset. 28 Therefore, the decision option to approve MP’s plan includes language to clarify that “approval” does not imply the Commission is determining each individual action is the most reasonable one. Instead, it approves MP’s plan as a reasonable whole. • Decision Option #1: Based on the record in this case to date, the Commission approves Minnesota Power’s 2013-2027 resource plan. This approval does not extend to particular projects that are currently under review in other proceedings or will be subject to review in future proceedings, but is a general finding that the plans filed by Minnesota Power appear to be reasonable in light of the entire record.

LPI does not go so far as to say MP’s resource plan should be rejected, but LPI has major concerns regarding the Strategist model’s ability to accurately reflect system dispatch and power flow. LPI recommends the Commission instead adopt a plan which continues to operate MP’s coal-fired facilities as baseload coal units. Such a plan is reflected in MP’s “Retrofit Small Coal” scenario: • Decision Option #2: Find Minnesota Power’s Retrofit Small Coal scenario to be leastcost. Further find that early retirement of any of Minnesota Power’s existing coal-fired units is not in the public interest. (Large Power Intervenors recommendation)

28

MP resource plan, Appendix H, p. 20.

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The Commission could adopt decision options #1 and #2 because the Retrofit Small Coal scenario is part of MP’s IRP. However, the Commission does not generally pick and choose a particular scenario embedded in resource plans, although Minn. Rule. 7483.0500, Subp. 2 authorizes the Commission to do so. 29 LPI will likely discuss at the Commission hearing whether or not approving the plan and adopting the Retrofit Small Coal scenario are consistent with one another. After all, if the Commission approves the IRP and does nothing else, presumably MP will pursue an action plan that is different from LPI’s recommendation. Staff notes that MP’s decisions to retire Taconite Harbor 3 and refuel Laskin Energy Center are probably predicated on the assumption that Boswell 4 will remain a coal-fired resource. However, MP’s Boswell 4 Retrofit Project docket (12-920) contemplates whether a natural gas alternative is preferable to emissions controls. MP claims that a 2-3 year supply gap will exist in the natural gas alternative. In this plan, MP would “more than double” its reliance on the wholesale market, which Staff considers to be an unreasonable plan. Because Boswell 4 provides roughly one quarter of MP’s energy requirements, Staff believes there is likely little value in approving MP’s resource plan if the Commission moves MP toward refueling the unit. If a non-coal option is pursued at Boswell 4, Staff recommends the Commission delay approving MP’s resource plan until final decisions have been made and new expansion plans are filed. • Decision Option #3: If the Commission determines a non-coal alternative should be pursued at Boswell 4, MP shall revise its expansion plan to include this alternative.

2. Findings of Fact As stated in Minn. Rule 7843.0500, Subpart 3., in issuing its findings of fact and conclusions, the Commission shall consider the characteristics of the available resource options and of the proposed plan as a whole. Resource plans must be evaluated on their ability to: A. maintain or improve the adequacy and reliability of utility service; B. keep the customers’ bills and the utility's rates as low as practicable, given regulatory and other constraints; C. minimize adverse socioeconomic effects and adverse effects upon the environment; D. enhance the utility’s ability to respond to changes in the financial, social, and technological factors affecting its operations; and E. limit the risk of adverse effects on the utility and its customers from financial, social, and technological factors that the utility cannot control.
29

Minn. Rules 7843.0500, Subpart 2.: If the commission concludes that a set of resource options would be optimal, it may identify that set of resource options as a preferred resource plan. A preferred resource plan need not have been specifically proposed or advocated by the utility, an intervening party, or other interested person.

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The Commission does not need to make findings of fact. However, if the Commission chooses to acknowledge the consistency with MP’s Preferred Plan and DOC’s recommendations, it could do so by making the following findings as part of the record: • • Decision Option #4: The Commission recognizes MP’s assertion that refueling Laskin units 1 and 2 to operate on natural gas by 2015 is reasonable. Decision Option #5: The Commission recognizes MP’s assertion that removing Taconite Harbor unit 3 from MP’s system by the end of 2015 is reasonable.

Staff does not believe there is an obvious benefit to the Commission making these findings because it seems the Company will pursue these actions anyway. Appendix M of MP’s Petition includes a public estimate from Burns & McDonnell that it will cost about $14 million to refuel LEC. Because the refuel is not a capacity increase, and because natural gas pipelines already run to LEC, MP may not need any certificates of need to make this investment. If the Commission determines it does not have enough information at this time to determine the reasonableness of the $14 million, it could avoid issuing Findings of Fact. The Commission could also take some other action, such as establishing reporting requirements for investments to be made at LEC. • Decision Option #6: Establish reporting requirements for costs related to MP’s proposed Laskin Energy Center refueling project and Taconite Harbor 3 retirement. MP must file updated project costs and schedules nine months after the Commission Order in the resource plan.

On the other hand, issuing findings of fact consistent with MP’s and the Department’s modeling could more explicitly advance a particular direction for the Company to take, if the Commission believes these actions are in the public interest. If the Commission agrees that the modeling throughout the previous IRP, the baseload study, and the instant IRP are conclusive, it could adopt decision options #4 and #5.

Taconite Harbor 1 and 2 Minn. Rules 7843.0500, Subpart 2 states that the Commission conclusions regarding the optimal plan “need not have been specifically proposed or advocated by the utility, an intervening party, or other interested person.” Retiring Taconite Harbor 1 and 2 represents one area in which the parties go in separate directions from the modeling results to their recommendations. MP’s analysis shows that “with consideration of a carbon penalty starting in 2017, the low cost solution includes a shutdown of all units at Taconite Harbor Energy Center.” 30 However, since MP does not believe using a carbon price is reasonable, the Company expects to continue Taconite Harbor 1 and 2 throughout the planning period.

30

MP Initial Filing, Appendix I, p. 12.

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The Department’s base case (which includes a CO2 price) retires Taconite Harbor 1 and 2 by 2017. However, DOC does not recommend the Commission take this action, largely due to the concern that MP would consequently rely too heavily on the wholesale market. The EIs recommend the Commission modify MP’s action plan to retire Taconite Harbor 1 and 2; therefore, Staff provides this recommendation as an option to the Commission: • Decision Option #7: In addition to the Company’s proposed retirement of Taconite Harbor 3, Minnesota Power should modify its Preferred Plan to retire Taconite Harbor 1 and 2 by 2017. (Environmental Intervenors recommendation)

In the Taconite Harbor Energy Center shutdown scenario, MP assumes to meet its needs with a 200 MW combined cycle facility in 2017. Since THEC is not in close proximity to a natural gas pipeline, this generation would presumably not be located at the THEC site, or near to it. Additionally, MP notes that transmission adequacy problems would occur by retiring all Taconite Harbor units, and transmission upgrades would be needed to maintain voltage and stability in the North Shore Loop. 31 If Commission finds that retiring all THEC units is in the public interest, MP should further develop the record to assess the requisite system improvements and how power flow would be managed in the North Shore Loop. Moreover, MP should clarify its plans to replace THEC and detail its reliance on the wholesale market as a viable alternative. Since MP notes that THEC 1 and 2 do not need major capital investments to comply with MATS, Staff believes this evaluation can be included as a requirement for the next IRP and not a modification to this IRP.

Market Purchases MP’s Preferred Plan includes annual 50 MW purchases as a capacity bridge until 2021. The Department recommends the Commission require MP to add about 200 MW of intermediate capacity in the 2015-2017 timeframe, as long as the resource is reasonably priced. • Decision Option #8: Require MP to obtain about 200 MW of intermediate capacity (and associated energy) by constructing the resource itself, sharing in the ownership of the resource, or by procuring the resource through bilateral contracts, whichever option is most cost-effective. (DOC recommendation)

Staff’s primary concern with MP’s resource plan is the interaction of its MATS compliance strategy with its market reliance. MP’s Petition provides the Company’s base case L&C projection without unit retirements. This outlook shows a slight capacity surplus (in the summer) through 2017. Subtracting the 75 MW from Taconite Harbor 3, however, would leave MP with a 2016 capacity deficit in both summer and winter seasons, which exceed the 50 MW wholesale capacity bridge: 32

31 32

Appendix F, p. 17. The annual summer season capacity deficit without Taconite Harbor 3 is shown on Page 57 of MP’s Petition.

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Seasonal Peak Summer Winter

Surplus / (Deficit) in 2016 (in MW) 16 (52)

Surplus / (Deficit) in 2016 without Taconite Harbor 3 (in MW) (59) (127)

It is not clear why the Company is pursuing a bilateral market purchase when a one-year extension from MPCA for Taconite Harbor 3 may be available to them. MP has not requested an extension even though the flexibility certainly exists for the Company to do so. It could simply be a modeling choice, but as the table shows, a reliability risk occurs in 2016. There is not a decision option before the Commission to require Taconite Harbor 3 to continue operating for an additional year, but Staff recommends MP bring more clarity to the bilateral purchase to answer the following questions: • • • Why is the bilateral purchase preferable to existing generation in 2016? Is the bilateral purchase consistent with the Department’s recommendation? If not, why not? and Will the bilateral purchase meet summer needs, winter needs, or both?

In this case, the distinction between summer versus winter reliability, as well as what season the IRP should actually be focusing on for reliability purposes, may be particularly important. MP is a winter-peaking utility, but bases its resource need on the summer L&C for resource adequacy. This is because MP has historically been able to meet winter needs with surplus capacity on the wholesale market since most other regional utilities are summer peaking. According to MISO, however, “reserve margins are eroding with EPA retirements,” and MISO expects roughly 10 GW of retirements in the 2013-2016 timeframe. 33 Interestingly, due to potential gas derates, historic winter maintenance assumptions, and lack of demand response resources registered in summer months, MISO expects the capacity shortfall to be greater in the winter than in the summer. MISO’s June 2013 Forward Resource Assessment shows a potential 6 GW shortfall (the red bar) in the winter for 2013-2016, under moderate load forecast conditions:

33

June 6, 2013 MISO Forward Resource Assessment.

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This winter shortfall projection does not include other complicated factors MISO faces for providing gas supply, such as lack of pipeline infrastructure, collaboration with the large number of pipeline owners, and competition between electric load-serving entities and local distribution companies for firm gas transportation. 34 With or without the Taconite Harbor 3 retirement, MP expects a capacity shortfall in Winter 2016. If MP retires Taconite Harbor 3 to comply with MATS, the Company expects to have a capacity deficit greater than the amount of its bilateral purchase in both Summer and Winter 2016. The Commission could modify MP’s action plan by adopting DOC’s recommendation to add 200 MW of intermediate capacity, instead of MP’s proposed 50 MW. MP and LPI oppose this approach and believe this would inappropriately increase rates for unneeded capacity. If the Commission does not modify MP’s action plan, it could identify MP’s needs projection in the Order. For example, in Xcel’s most recent IRP, the Commission made a finding in the Order identifying Xcel’s projected capacity need and the years in which the deficit is likely to occur. 35 According to page 5 of Appendix H, MP states, “Bridge purchase energy pricing is based on the equivalent of purchasing energy from a natural gas combine cycle and was modeled as an intermediate type energy resource.” The Department also recommends procurement of intermediate resources. Thus, since MP’s bridge purchases are modeled as an intermediate resource, the Commission could find that intermediate resources reasonably meet MP’s projected needs for the five-year action plan:

34 35

MISO’s July 3, 2013 responses to FERC in FERC Docket No. AD12-12 Docket No. 10-825, In the Matter of Xcel Energy's 2011-2025 Integrated Resource Plan.

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Decision Option #9 With MP’s proposed retirement of Taconite Harbor 3, the current resource plan demonstrates Minnesota Power’s need for an additional 50 MW in 2015, increasing up to 100 MW by 2019. Based on the modeling in the record, adding intermediate resources most appropriately reflects the type of MP’s system needs.

3. Compliance Filings Staff does not propose a “mini-IRP” like the baseload diversification study in this instance. The Company’s previous baseload study proceeding took a full year to complete and ended with MP suggesting the Commission not to use the modeling for any decision-making purposes. In addition, there do not appear to be similar modeling deficiencies in the instant IRP that might require a year-plus of analysis. However, the Commission can always require supplemental information for areas which need further development or clarification.

Wholesale Market Issues MP expects to “use asset backed bilateral market purchases to flexibly help bridge energy and capacity requirements in the period between 2014 and 2020.” 36 It is a modeling choice for MP to represent these bilateral market purchases as 50 MW blocks. Staff does not disagree with this choice because, under Minn. Rule 7843.0400, Subp. 2, “The utility is only required to identify a resource option generically, unless a commitment to a specific resource exists at the time of the filing.” However, in the window of MATS compliance, which coincides with the timeframe in which MP expects capacity deficits, the Commission may request more information to determine what MP will actually be procuring and whether these commitments are actually cost-effective. • Decision Option #10: When MP commits to a specific bilateral contract, the Company shall file pertinent details of the contract, such as the duration, price, and amount of capacity and associated energy to be procured.

MISO market participants are required to submit an Attachment Y if a decision is made to retire a unit. Once the Attachment Y is submitted, MISO determines within the next 26 weeks whether the unit is needed for reliability. If so, MISO would designate that unit as a System Support Resources (SSRs) and delay the retirement. The PUC has an outstanding Notice to all utilities to notify the Commission if a utility has made any requests for MISO to conduct any SSR studies under MISO’s Attachment Y process. 37 Therefore, it may be a redundant requirement for a resource plan, but Staff believes it is appropriate that all Attachment Y-related filings be included as part of the IRP record: • Decision Option #11: Direct Minnesota Power to file with the Commission all relevant MISO Attachment Y requests and the results of each, including whether MP has requested MISO to evaluate any MP unit as a System Support Resource.

36 37

MP Initial Filing, p. 14. MPUC Notice, December 4, 2012.

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MP states the Company is working closely with MISO to take the necessary steps to determine the impact of its short-term action plan on the reliability of the regional transmission system. MP expects to submit an Attachment Y for Taconite Harbor 3 in 2013 to request a 2015 shutdown of the unit. Staff recommends the Commission direct MP to keep all parties apprised of these ongoing discussions with MISO.

Rapids Energy Center The Department’s modeling indicates retiring Rapids decreases MP’s system cost with or without CO2 costs included. In DOC’s initial comments, the Department recommended MP provide in its reply comments the present value of the cost to shut down the Rapids unit so that the Commission has the proper record to base a decision upon. MP did not provide this analysis in its reply comments. MP does not agree that a shut down evaluation is appropriate. MP notes that because several aspects of Rapids’ and Blandin’s operations are interdependent, a shutdown evaluation of Rapids would require that the Blandin paper mill also be shut down as it requires steam from Rapids to operate. In addition, the Commission already has a Petition to request that Rapids be moved to the Company’s regulated rate base in order to provide valuable and flexible renewable biomass energy to its customers. The Commission has the option to require MP to perform the analysis to test the costeffectiveness of the Rapids unit before the assets are transferred into its regulated operations. The question of what costs ratepayers will or could bear is separate to the question of whether the Commission should order its retirement. Transferring assets into rate base also carries with it a transfer of risk to ratepayers. The Department’s recommendation for MP to evaluate shut down costs applies to the question of what risks ratepayers could incur, not necessarily what operational decisions the Commission will make. • Decision Option #12: Require MP to provide the present value of the cost to shut down the Rapids unit so the Commission has a proper record to base a decision upon whether to transfer its assets into regulated operations. (DOC recommendation)

Staff notes that the timing of this decision option is awkward for IRP because the Commission is also considering MP’s Petition for its transfer of assets in Docket No. 12-349. Therefore, the Commission could decide whether or not IRP is the appropriate place to consider this matter.

50/75 Percent Scenario The EIs contend that MP’s resource plan is incomplete because it did not include a least-cost plan for refurbished capacity at Boswell 4. Minn. Stat. §216B.2422, subd. 2 states:

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As a part of its resource plan filing, a utility shall include the least cost plan for meeting 50 and 75 percent of all new and refurbished capacity needs through a combination of conservation and renewable energy resources. The Department agrees with the EIs recommendation to supplant the record with a 50/75 percent renewables and conservation scenario at Boswell 4. • Decision Option #13: Require MP to supplement its IRP filing to include a least-cost plan that meets 50 percent and 75 percent of all new and refurbished capacity needs, including the refurbishment of Boswell 4, through a combination of conservation and renewable energy resources.

MP argues that the Commission’s May 10, 2013 Order finding of completeness already confirmed that the Company’s IRP appropriately complies with all statutory requirements. Staff does not believe that the Commission’s completeness order makes any final determinations of IRP review. Ideally, parties would be able to identify everything missing during the completeness review, but that is not a realistic goal. The Commission can always require supplemental information in a resource plan, whether or not it makes a finding on completeness. While the Commission can require MP to supplement the record with a least cost plan for 50/75 percent of refurbished capacity, the extent of this requirement is complicated. One question is whether the refurbishment only applies to Boswell 4. MP’s Small Coal Retrofit scenario, for example, refurbishes almost all of MP’s baseload units. MP’s Preferred Plan refuels Laskin Energy Center and requires some additional emissions control at Taconite Harbor 1 and 2. It is not clear from the EIs’ recommendation whether a 50/75 percent plan is needed for all of MP’s coal units or just Boswell 4. If the recommendation applies to all, an issue is how much time would be required to perform this analysis. If it applies only to Boswell 4, the issue is whether it is appropriate to evaluate this in IRP, or in the pending 12-920 docket. A second question is whether this least cost plan would be filed after or before the approval of the resource plan. Since the EIs’ overall conclusion is that MP’s plan cannot be approved in its incomplete form, the Commission could consider whether it is desirable to delay approval of the entire plan until the complete analysis can be undertaken.

4. Issues for MP’s Next Resource Plan Minn. Rule. 7843.0500, Subp. 4. states: Issues requiring further consideration. In its decision, the commission may direct the utility to provide in its next resource plan filing a discussion of specified issues. The issues may include those not totally resolved in the current proceeding and those for which the state of knowledge is changing substantially between resource plan filings. Deadline for MP’s next IRP

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At this point, Staff has not identified any advantage or disadvantage to varying the two-year rule for MP’s next IRP filing date (defined in Minn. Rule 7843.0300, Subp. 2). Thus, Staff proposes March 1, 2015 as a starting point: • Decision Option #14: MP shall make its next resource plan filing on or before March 1, 2015.

The Commission could set a filing date for MP’s next IRP that is earlier than the two-year rule if there are pressing issues which require updated modeling. In previous IRP proceedings, the Commission has expressed interest in seeing more regularly refreshed data as well as planninglevel filings regarding system optimization issues, such as wind integration. The Commission could also require MP to file its forecast data and Strategist commands before the IRP is filed. For example, as a requirement for CenterPoint Energy’s 2013 rate case, the Commission required CenterPoint to “file any, and all, data for its sales forecast in advance of its next general rate case.” If the Commission is interested in this option, MP could file its forecast and Strategist commands 30 days prior to its IRP, so the Department could begin setting up its Strategist model ahead of time. • Decision Option #15: MP shall file its energy and demand forecast and Strategist commands 30 days prior to its IRP filing date.

Since MP and the Department will be the modelers, Staff defers to them to recommend to the Commission whether or not this option would be feasible or realistically achieve its purpose to expedite resource plan review.

Energy Savings Goal Staff believes the energy savings proposals for this 15-year planning period are far too underdeveloped to be meaningfully considered by the Commission. Since MP’s 2014-2016 CIP was filed in June 2013, and both the IRP and CIP dockets have overlapping parties and comments, Staff believes the CIP process can define the appropriate savings level until MP’s next IRP. However, Staff believes major progress needs to be made from now until MP’s next IRP in order to construct some level of cost-benefit analysis for energy savings. To the extent the Commission wants to provide planning guidance to MP on energy savings goals, Staff notes that a cost curve does not really exist for the Commission to be able to consider energy efficiency as a resource on an incremental basis. MP recommends the Commission approve its plan to meet the 1.5 percent energy savings goal. However, since MP assumes a constant 52.3 million kWh of energy savings in every year of the planning period, but the sales forecast grows, it is not even obvious which years MP will achieve this goal.

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The Department recommends the Commission approve 1.87 percent of savings for non-CIP opt out customers. This seems to be because the Department, not MP, estimates the Company’s baseline energy savings at 1.67 percent, and DOC concludes another 0.2 percent could costeffectively be captured. However, since MP did not apply any costs to incremental energy savings, the Company could not verify if this incremental level is cost-effective. Since the additional 0.2 percent of energy savings recommended by the Department does not impact MP’s action plan, Staff proposes the Commission adopt DOC’s recommendation for the next resource plan, not as a modification to the instant IRP. • Decision Option #16: Require MP to procure energy savings equal to 1.87 percent of retail sales by the Company’s next IRP.

There is a risk that embedding 1.87 percent of retail sales for the next 15 years could lead to MP under-forecasting its needs, if MP cannot reasonably achieve that goal. Decision options 17a.-d. reflect areas where Staff could not verify how MP is modeling its energy savings in the instant IRP, but which could be helpful for the next one. • Decision Option #17: For the Company’s next IRP, the Commission directs MP to: a. Identify the amount of energy savings embedded in each year of its load forecast, in terms of total savings (kWh) and as a percentage of non-opt-out retail sales; b. Identify the amount of system-wide energy savings, including opt-out customers, embedded in each year of its load forecast. c. Evaluate additional conservation scenarios for its non-opt-out customers, which achieve energy savings above 1.5 percent; and d. Provide cost assumptions for achieving every 0.1 percent of savings above 1.5 percent of non-opt-out retail sales. The EIs contend that the statutory changes in H.F. 729 create conservation mandates distinct from CIP requirements. Thus, MP is now required to plan for energy savings based on total retail energy sales (which is relevant to Staff decision option 17b.). In addition, the EIs emphasize the significant potential for energy efficiency among MP’s industrial customer base. The EIs recommend the Commission modify MP’s IRP to reflect higher levels of energy savings, and to include its industrial, CIP-exempt customers. As with DOC’s recommendation, Staff alters the EIs recommendation to be a requirement for the next IRP. • Decision Option #18: For the Company’s next IRP, the Commission directs MP to report yearly data on the aggregate energy and peak demand savings realized by CIPexempt customers.

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Carbon Values In previous resource plans for investor-owned utilities, the Commission has ordered Minnesota Power, 38 Interstate Power & Light, 39 Otter Tail Power, 40 and Xcel Energy 41 to include CO2 prices in the base case for planning purposes. Inclusion of CO2 in the base case has the dual purpose of statutory compliance and providing a level of consistency with the Department’s modeling. DOC’s base case includes a CO2 price at the midpoint of the Commission’s approved range of values, or $21.50/ton starting in 2017. To determine what impact carbon pricing has on the expansion plan, Staff believes it is beneficial to have utilities and the Department aligned in their modeling, to the extent practicable. MP and LPI strongly disagree with the inclusion of CO2 in the baseline assumptions, noting that carbon regulation at the federal level is at best a speculative proposition. Page 75 of MP’s resource plan states: The current Commission requirement to consider a carbon regulation penalty in 2017 in its resource planning evaluation is a speculative cost increase projection for Minnesota customers. Until a carbon regulation penalty is determined at the national or state level, impeding resource plans with an assumed carbon price penalty and taking premature actions could increase costs to Minnesota electric consumers for speculative reasons without delivering commensurate environmental benefits. Staff disagrees with MP that considering CO2 for system planning is a “speculative cost increase” or that considering CO2 “impedes resource plans.” First, previous Commission orders requiring CO2 price assumptions have been based, in large part, on compliance with existing Minnesota statutes, not probabilities of near-term federal tax policy. Minn. Stat.§216H.06 required the Commission to establish an estimate of the likely range of costs of future CO2 regulation on electricity generation. In addition, Minn. Stat. §216H.02 established goals of achieving a 15 percent reduction in CO2 emissions from 2005 levels by 2015, a 30 percent reduction by 2025, and an 80 percent reduction by 2050. Resource plans are a planning tool, and the Commission may consider CO2 prices in resource planning differently than another proceeding, such as a certificate of need. It is also up to the Commission to determine the weight of those scenarios which include CO2 values. According to MP’s own analysis, its MATS compliance strategy to refuel Laskin and retire Taconite Harbor 3 is reasonable with or without CO2 costs.

38 39

Docket No. 09-1088 Docket No. 08-673 40 Docket No. 10-623 41 Docket No. 10-825

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However, if the Commission chooses to weigh CO2 scenarios more heavily, that decision option is available in the form of retiring Taconite Harbor 1 and 2. MP’s Petition states that retiring Taconite Harbor 1 and 2 is least-cost when carbon is considered. Because MP is a coal-dominant utility, it is understandable that MP would object to assuming a carbon price. Nevertheless, Staff believes the legislature has at least provided guidance that CO2 emissions should be considered for planning purposes. Staff does not agree that simply applying CO2 as a sensitivity, such as high/low capital costs, gives the appropriate acknowledgement to the state legislature’s direction. Second, the Commission has not historically treated the CO2 values in IRP as a de facto carbon tax, but instead as a risk assessment. Minn. Rule 7843.0500 (Commission Review of Resource Plans), Subp.3E states that resource plans should “limit the risk of adverse effects on the utility and its customers from financial, social, and technological factors that the utility cannot control.” Commission Order Point #2 in the CO2 values docket discusses its rationale for applying a range of CO2 values in their resource planning as of 2017: 42 The Commission recognizes that while the costs of carbon pollution are not currently regulated, they continue to be real. And, while the regulatory environment regarding CO2 emissions continues to be uncertain, such regulation will likely eventually occur, with concomitant costs for ratepayers. The Commission therefore concludes that to wait until 2020 or later to require utilities to being applying CO2 cost values in their resource planning, as proposed by the utilities, is also problematic. On June 25, 2013, President Obama issued a Presidential Memorandum requesting EPA to develop greenhouse gas emission standards for existing power plants. The President’s Memorandum to EPA sets the following schedule for implementation: • • • June 1, 2014: deadline for EPA to issue proposed rules to govern the process of establishing existing source performance standards. June 1, 2015: deadline for EPA to issue final rules governing the process of establishing existing source performance standards. June 30, 2016: deadline for States to submit the required state-specific performance standards for existing sources.

While the Presidential Memorandum does not specify a regulation level by which power plants must comply with the standards, and while schedules could easily be delayed by litigation and other issues, the Memorandum does seem to be the Obama Administration’s principal environmental initiative for the next three years. Given these state- and federal-level planning requirements, and since MP generates roughly 80 percent of its energy from coal, Staff believes bringing the CO2 impact question to the forefront
42

Docket No. 07-1199

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of the discussion has merit. The legislature has set goals for statewide CO2 emission reductions, the Commission has typically been interested in knowing the impact of carbon pricing in resource plans, and the the Commission has been interested in knowing how modeling discrepancies between the utilities and the Department—not just for CO2—affect the resource plan overall. Therefore, Staff recommends the Commission require MP to include CO2 values in its base case assumptions for its next resource plan: • Decision Option #19: Require MP to include some CO2 value within the Commission’s approved range in its base case assumptions for its next resource plan.

Greenhouse Gas Goal The Department was not able to model a CO2 reduction scenario, pursuant to Minn. Stat. §216H.02 Subd. 1. DOC notes that this contingency failed due to MP’s market design and the lack of time provided for comments to remedy the error in Strategist. The Department typically includes a chart showing the utilities’ CO2 emissions during the planning period. MP did not attach CO2 emissions to use of the spot market; therefore, the Department concludes MP’s model does not produce the proper level of CO2 emissions. As shown in Table 2 from MP’s reply comments, roughly one quarter of MP’s energy need is served by market purchases.

The reference year for meeting greenhouse gas targets defined in §216H.02 is 2005. Since market purchases only served 11 percent of MP’s energy need in 2005 – compared to 24 percent in 2012 – increased utilization of the wholesale market technically represents a greenhouse gas achievement if no externalities are applied. To the extent the Commission is interested in this issue, it could direct MP to work with the Department to resolve this modeling discrepancy before MP’s next resource plan: • Decision Option #20: Direct MP to work with the Department to develop a methodology to account for greenhouse gas emissions in the spot market for the purposes of modeling the Minnesota Greenhouse Gas Reductions Goal.

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Solar Energy Standard / Impact of Legislative Changes MP’s reply comments state that the Company “will provide a full analysis of its solar energy standard compliance plans in its next integrated resource plan.” The EIs submit that H.F. 729 requires IRP to consider more aggressive efforts to capture cost-effective demand-side savings. Since MP states its intention to incorporate legislative changes in its next resource plan, it may be a redundant requirement for the Commission to order MP to discuss its plan for new legislation, such as the solar energy standard. However, decision option #21 is for the Commission to identify any specific issues it wishes to address for MP’s next resource plan, including the legislative changes. • Decision Option #21: Direct Minnesota Power to provide a summary of its compliance with new statutory measures and how the legislative changes impact its resource plan.

Staff developed a table as Attachment B of this document to provide the Commission with relevant statutes and how MP’s IRP addresses them.

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Decision Options
Approval 1. Based on the record in this case to date, the Commission approves Minnesota Power’s 2013-2027 resource plan. This approval does not extend to particular projects that are currently under review in other proceedings or will be subject to review in future proceedings, but is a general finding that the plans filed by Minnesota Power appear to be reasonable in light of the entire record. 2. Find Minnesota Power’s Retrofit Small Coal scenario to be least-cost. Further find that early retirement of any of Minnesota Power’s existing coal-fired units is not in the public interest. (Large Power Intervenors recommendation) 3. If the Commission determines non-coal options should be pursued at Boswell 4, require MP to submit an updated expansion plan to include this non-coal alternative. Findings of Fact 4. The Commission recognizes MP’s assertion that refueling Laskin units 1 and 2 to operate on natural gas by 2015 is reasonable. 5. The Commission recognizes MP’s assertion that removing Taconite Harbor unit 3 from MP’s system by the end of 2015 is reasonable. 6. Should MP pursue decision option #4 or #5, the Commission establishes reporting requirements for costs related to MP’s proposed Laskin Energy Center refueling project and Taconite Harbor 3 retirement. MP must file updated project costs and schedules nine months following the Commission Order in the resource plan. 7. In addition to the Company’s proposed retirement of Taconite Harbor 3, Minnesota Power should modify its Preferred Plan to retire Taconite Harbor 1 and 2 by 2017. (Environmental Intervenors recommendation) 8. Require MP to obtain about 200 MW of intermediate capacity (and associated energy) in the 2015-2017 timeframe by constructing the resource itself, sharing in the ownership of the resource, or by procuring the resource through bilateral contracts, whichever option is most cost-effective. (DOC recommendation) 9. With MP’s proposed retirement of Taconite Harbor 3, the current resource plan demonstrates Minnesota Power’s need for an additional 50 MW in 2015, increasing up to 100 MW by 2019. Based on the modeling in the record, adding intermediate resources most appropriately reflects the type of MP’s system needs. 43
Staff note: Option #8 is a procurement decision based on the Department’s modeling outcome. Option #9 is a finding of projected needs, based on Minnesota Power’s forecast.
43

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Compliance Filings 10. When MP commits to a specific bilateral contract, the Company shall file pertinent details of the contract, such as the duration, price, and amount of capacity and associated energy to be procured. 11. Direct Minnesota Power to file with the Commission all relevant MISO Attachment Y requests and the results of each, including whether MP has requested MISO to evaluate any MP unit as a System Support Resource. 12. Require MP to provide the present value of the cost to shut down the Rapids unit so the Commission has a proper record to base a decision upon whether to transfer its assets into regulated operations. (DOC recommendation) 13. Require MP to supplement its IRP filing to include a least-cost plan that meets 50 percent and 75 percent of all new and refurbished capacity needs, including the refurbishment of Boswell 4, through a combination of conservation and renewable energy resources.

Issues for the Next Resource Plan 14. The Company shall make its next resource plan filing on or before March 1, 2015.

15. MP shall file its energy and demand forecast and Strategist commands 30 days prior to its IRP filing date.

16. Require MP to procure energy savings equal to 1.87 percent of retail sales by the Company’s next IRP. (DOC recommendation)

17. For the Company’s next IRP, the Commission directs MP to: a. Identify the amount of energy savings embedded in each year of its load forecast, in terms of total savings (kWh) and as a percentage of non-opt-out retail sales; b. Identify the amount of system-wide energy savings, including opt-out customers, embedded in each year of its load forecast. c. Evaluate additional conservation scenarios for its non-opt-out customers, which achieve energy savings above 1.5 percent; and d. Provide cost assumptions for achieving every 0.1 percent of savings above 1.5 percent of non-opt-out retail sales.

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18. MP shall report yearly data on the aggregate energy and peak demand savings realized by CIP-exempt customers. (Environmental Intervenors recommendation)

19. Require MP to include some CO2 value within the Commission’s approved range in its base case assumptions for its next resource plan.

20. Direct MP to work with the Department to develop a methodology to account for greenhouse gas emissions in the spot market for the purposes of modeling the Minnesota Greenhouse Gas Reductions Goal.

21. Require MP to provide a summary of its compliance with new statutory measures and how the legislative changes impact its resource plan.

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Attachment A. CPUC Report: Survey of Utility Resource Planning and Procurement Practices

[continued on next page]

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Attachment B: Compliance with Minnesota Resource Planning Statutes
Subject New Relevant Statutes RES Cost Impact Standard Reports Solar Energy Standard (SES) Chapter 85, Art 7, Sec 3; amends 216B.1691, subd. 2e Chap 85, Art 10, Sec 3; amends 216B.1691 Chapter 132, Sec 3; amends 216B.2422, subd. 4 - MP already presents RES cost impacts in its IRP Petitions -MP stated its intentions to evaluate the SES as part of its next IRP - MP must discuss how its IRP helps it achieve GHG reduction goals in 216H.02, RES, and Solar Energy Standard (SES). -MP modeled all environmental externalities from the Commission’s approved State Externalities docket in its base case planning assumptions. -MP modeled two versions of its base case: a base case with $0 for CO2 and a base case with CO2 at the midpoint of the Commission’s approved range. -According to MP, “The 2015 goal of 15% below 2005 GHG emissions is anticipated to be met while implementing 2013 Plan provisions -The Department could not model MP’s system CO2 emissions because MP did not apply any CO2 values to its market purchases. -MP’s historical average of energy savings has typically been above 1.5 percent savings. For its 2013 IRP, MP claims they expect to achieve at least 1.5 percent for the planning period. -After the addition of its Bison 4 wind project, MP expect to generate about 24 percent of projected 2025 sales from renewables.. -MP does not propose a new large energy facility that contributes to statewide power sector CO 2 emissions -Appendix G, Part 2 of MP’s petition discusses C-BED projects -Appendix G, Part 2 of MP’s petition discusses distributed generation -MP provides an RES cost impact report in Appendix G of its Petition Cite Notes

Renewable Preference Existing Relevant Statutes Environmental externalities

§216B.2422, subd. 3

Carbon values

§216H.06

Minnesota CO2 Goal

§216H.02

Conservation

§216B.2421, subd. 1c(d)

Renewable energy Greenhouse Gas Control Plan C-BED Goal

§216B.1691

§216H.03 §216B.2426 subd. 5(b) §216B.2426 §216B.1691 subd. 2e

Distributed Generation RES Cost Impact

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