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BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF COLORADO

* * * * *

IN THE MATTER OF THE APPLICATION OF )


PUBLIC SERVICE COMPANY OF )
COLORADO FOR APPROVAL OF ITS 2016 ) PROCEEDING NO. 16A-0396E
ELECTRIC RESOURCE PLAN )
)

______________________________________________________________________

STATEMENT OF POSITION OF PUBLIC SERVICE COMPANY OF COLORADO


_______________________________________________________________________
TABLE OF CONTENTS

I. INTRODUCTION .................................................................................................. 1
II. THE ERP PROCESS: ARCHITECTURE AND GOALS ........................................ 1
A. ERPs focus on procurement of resources to fill incremental needs...................... 4
B. Prior Commission ERP decisions establish relevant principles. ........................... 8
C. The policy context of this 2016 ERP. .................................................................... 9
D. Phase I decision points and considerations. ....................................................... 11
III. KEY DECISIONS AND CONSIDERATIONS IN THIS ERP ................................ 12
A. The resource need determination. ...................................................................... 12
i. The consensus approach to evaluating the resource need .............................. 12
ii. The RAP and Planning Period ...................................................................... 17
B. Setting the stage for a robust Phase II competitive solicitation. .......................... 20
i. Capital and O&M costs for utility ownership bids .......................................... 20
ii. Benefits and risks of PPAs and utility-owned generation .............................. 24
iii. The Companys proposed book lives ............................................................ 26
iv. RFPs and model contracts............................................................................ 28
C. Determining the modeling parameters................................................................ 28
i. Annuity method ............................................................................................. 29
a. Relevant background on the annuity method. ........................................... 31
b. The principles of the annuity method create a three-legged stool. ............ 34
c. The Companys proposed application of the annuity method satisfies the
three principles. .................................................................................................. 37
d. CIEAs application of the annuity method is flawed and fails to satisfy the
three annuity method principles. ......................................................................... 39
e. CIEAs application of the annuity method leads to absurd results. ............ 40
f. CIEAs application of the annuity method gives rise to additional issues and
implementation questions. .................................................................................. 42
g. The Companys application of the annuity method should be approved by
the Commission. ................................................................................................. 44
ii. GPVM Adder ................................................................................................. 44
a. Upside natural gas price risk is real and must be addressed..................... 45
b. The GPVM Adder has adjusted to changing market conditions over time. 47
c. There is not widespread confusion about the basis for the GPVM Adder. . 49
d. The Companys proposed approach to the GPVM Adder in Phase II
provides transparency and should be approved. ................................................ 51
iii. Carbon pricing............................................................................................... 51
a. This Commissions statutory authority with regard to carbon pricing. ........ 53
b. Public Services carbon proxy prices are reasonable and a carbon price
should not be included in the base case............................................................. 57
c. A third carbon sensitivity based on the SCC is extraneous and
inappropriate....................................................................................................... 61
iv. Natural gas price forecast ............................................................................. 64
v. Strategist modeling capabilities..................................................................... 68
a. The excess capacity procurement proposal is contrary to ERP Rules. ..... 69

i
b. Forced retirements of generation resources constitute a regulatory taking.
72
c. These legal issues are relevant to Strategist capabilities. ......................... 76
vi. Discount rate ................................................................................................. 77
vii. Surplus capacity credit .................................................................................. 82
D. Approving the necessary studies. ....................................................................... 84
i. The Expanded Flex Reserve study ............................................................... 86
ii. Study expansion to 4.5 GW .......................................................................... 91
E. Determining any appropriate sensitivities. .......................................................... 92
F. The role of the IE. ............................................................................................... 94
G. Miscellaneous issues.......................................................................................... 95
i. Economic indicators ......................................................................................... 96
ii. The City of Boulder load ............................................................................... 99
iii. Storage bids ................................................................................................ 101
iv. The SPS Diversity Exchange ...................................................................... 102
v. O&M actuals proceeding............................................................................. 104
vi. Coal supply reporting .................................................................................. 105
IV. NEXT STEPS AND CONCLUSION .................................................................. 106
A. Future Rulemaking ........................................................................................... 106
B. Summary of Recommendations ....................................................................... 107

ii
TABLE OF AUTHORITIES

PAGE(S)
Cases

Anderson v. Longmont Toyota, Inc., 102 P.3d 323 (Colo. 2004)................................... 56

City and Cnty. of Denver v. Bd. of Assessment Appeals of State of Colo., 947 P.2d 1373
(Colo. 1997) (en banc) .................................................................................................. 56

City of Fort Morgan v. Colo. Pub. Util. Comm'n, 159 P.3d 87 (Colo. 2007) ................... 74

Colo. Min. Ass'n v. Bd. of Cnty. Comm'rs of Summit Cnty.,


199 P.3d 718 (Colo. 2009) ............................................................................................ 56

In re Marriage of Ikeler, 161 P.3d 663 (Colo. 2007) ...................................................... 56

Leaffer v. Zarlengo, 44 P.3d 1072 (Colo. 2002) ............................................................ 56

Lingle v. Chevron U.S.A., Inc. 544 U.S. 528 (U.S. 2005) .............................................. 74

Morey v. Pub. Util. Comm'n, Colo., 629 P.2d 1061 (Colo. 1981)................................... 64

Penn Cent. Transp. Co. v. City of New York,


438 U.S. 104 (U.S. 1978) .................................................................................. 73, 74, 75

People v. Nara, 964 P.2d 578 (Colo. App. 1998) .......................................................... 56

Sangre de Cristo Elec. Ass'n. v. Pub. Util. Comm'n, 524 P.2d 309 (Colo. 1974) .......... 64

Turbyne v. People, 151 P.3d 563 (Colo. 2007) ............................................................. 56

United States Gypsum, Inc. v. Ind. Gas Co., 735 N.E.2d 790 (Ind. 2000) ..................... 21

Zero Zone, Inc. v. U.S. Dept. of Energy, 832 F.3d 654 (7th Cir. 2016) ......................... 55

Constitutional Provisions

U.S. CONST. amend. V. ............................................................................................ 73, 76

Executive Materials

Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Oct. 4, 1993) ....................................... 55

iii
Statutes

C.R.S., 2-4-201 ........................................................................................................... 56

C.R.S., 2-4-203 ........................................................................................................... 56

C.R.S., 40-2-123 ..........................................................53, 54, 55, 56, 57, 58, 61, 63, 64

C.R.S., 40-5-101 ......................................................................................................... 72

C.R.S., 40-6-115 ......................................................................................................... 63

Minn. Stat. 216H.06..................................................................................................... 62

Minn. Stat. 216B.2422 ........................................................................................... 62, 63

N.D. Cent. Code 49-02-23........................................................................................... 63

Colorado Legislation

H.B. 06-1281, 65th Gen. Assem., 2nd Reg. Sess. (Co. 2006)........................................... 1

S.B. 07-100, 66th Gen. Assem., 1st Reg. Sess. (Co. 2007).............................................. 1

H.B. 07-1037, 66th Gen. Assem., 1st Reg. Sess. (Co. 2007) ........................................... 1

H.B. 07-1281, 66th Gen. Assem., 1st Reg. Sess. (Co. 2007) ........................................... 1

H.B. 10-1365, 67th Gen. Assem., 1st Reg. Sess. (Co. 2010) ........................................... 6

Colorado Public Utilities Commission Rules

Rule 3103, 4 C.C.R. 723-3 ............................................................................................ 75

Rules 3600 3619, 4 C.C.R. 723-3 ................................................................................ 1

Rule 3601, 4 C.C.R. 723-3 ........................................................................ 2, 9, 12, 26, 70

Rule 3602, 4 C.C.R. 723-3 ...................................................................... 9, 17, 70, 81, 82

Rule 3603, 4 C.C.R. 723-3 .............................................................................................. 1

Rule 3604, 4 C.C.R. 723-3 .......................................................................... 28, 60, 81, 83

iv
Rule 3605, 4 C.C.R. 723-3 .............................................................................................. 4

Rule 3607, 4 C.C.R. 723-3 .............................................................................. 4, 9, 70, 71

Rule 3610, 4 C.C.R. 723-3 ...................................................................... 4, 5, 6, 9, 53, 71

Rule 3611, 4 C.C.R. 723-3 ........................................................................................ 9, 71

Rule 3612, 4 C.C.R. 723-3 ...................................................................................... 94, 95

Rule 3617, 4 C.C.R. 723-3 .................................................................................... 3, 4, 11

Rule 3618, 4 C.C.R. 723-3 ............................................................................................ 16

Colorado Public Utilities Commission Decisions

In the Matter of the Petition for Declaratory Judgment Filed by Kinder Morgan, Inc., with
Regard to Issues Surrounding Renewal of Franchise Agreements with Bent and
Otero Counties, Proceeding No. 06D-026G, Decision No. C06-1118
(Sept. 26, 2006) ................................................................................................. 72, 73

In the Matter of the Application of Public Service Company of Colorado for Approval of
its 2007 Colorado Resource Plan, Proceeding No. 07A-447E, Decision No. C08-
0929 (Sept. 19, 2008) ........................... 1, 2, 3, 4, 5, 6, 7, 9, 10, 22, 50, 58, 78, 79, 80

In the Matter of the Application of Public Service Company of Colorado for Approval of
its 2007 Colorado Resource Plan, Proceeding No. 07A-447E, Decision No. C09-
1257 (Nov. 6, 2009) ................................................................................................... 6

In the Matter of the Application of Public Service Company of Colorado for Approval of
its 2011 Electric Resource Plan . , Proceeding No. 11A-869E, Decision No. C13-0094
(Jan. 24, 2013) ....................................................................6, 7, 31, 32, 57, 58, 65, 78

In the Matter of the Verified Petition of Public Service Company of Colorado for Certain
Declaratory Orders Concerning the Rights of Public Service Company of Colorado
Under its Service Territory Certificate Covering Boulder County, Colorado,
Proceeding No. 13D-0498E, Decision No. C13-1350 (Oct. 29, 2013) ..................... 75

In the Matter of the Application of Public Service Company of Colorado for Approval of
its 2011 Electric Resource Plan, Proceeding No. 11A-869E, Decision No. C13-1566 .
(Dec. 20, 2013) .................................................................................................... 7, 57

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In the Matter of the Application of Black Hills/Colorado Electric Utilities Company, LP for
(1) Approval of Its 2013 Electric Resource Plan, and (2) Approval of its 2013-2014
RES Compliance Plan, Proceeding No. 13A-0445E, Decision No. C15-0373
(Apr. 24, 2015) ................................................................................................... 65, 66

In the Matter of the Application of Public Service Company of Colorado for Approval of
its Electric Resource Plan Technical Inputs and Assumptions, Proceeding No. 16A-
0138E, Decision No. C16-0552 (June 21, 2016) ..................................................... 29

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I. INTRODUCTION

Public Service Company of Colorado (Public Service or Company) hereby

submits this Statement of Position (SoP) in the above captioned proceeding

addressing the Companys 2016 Electric Resource Plan (ERP). 1 Below, we frame the

ERP and the architecture and goals set forth in the Commissions ERP Rules, followed

by a discussion of the key determinations to be made by this Commission in this ERP

proceeding. 2 Finally, we briefly address next steps as the ERP process moves towards

the 2019 ERP due to be filed on or before October 31, 2019. 3 In doing so, the

Company is guided by the directives for this SoP provided by the Commission at the

final day of hearing. 4

II. THE ERP PROCESS: ARCHITECTURE AND GOALS

In 2007, in response to legislative directives from the General Assembly in 2006

and 2007, the Commission revisited its Least Cost Planning (LCP) Rules to address

substantive statutory changes set forth in House Bill (HB) 06-1281, HB 07-1037, HB

07-1281, and Senate Bill (SB) 07-100. 5 Least Cost Planning became Electric Resource

1
Attachment A to this SoP contains an Executive Summary of the Companys proposed
recommendations in this proceeding.
2
4 C.C.R. 723-3-3600-3619.
3
4 C.C.R. 723-3-3603(a).
4
Tr. IV, at 147:5 - 159:16 (Feb. 6, 2017).
5
Decision No. C08-0929 (Hr. Ex. 37), at 2, Proceeding No. 07A-447E (mailed Sept. 19, 2008). In
Proceeding No. 07A-447E addressing the Companys 2007 ERP (the first filed under the new ERP Rules),
the Commission addressed the impacts of each of these bills: HB 07-1037 requires that the Commission
establish energy savings and demand reduction goals, and sets minimum goals for investor-owned
utilities to achieve in their energy efficiency, conservation, load management, and demand response
programs . HB 07-1281 increases the amount of electricity a utility must generate or cause to be
generated from renewable energy resources under Colorados Renewable Energy Standard (RES) .
HB 06-1281 requires the Commission to consider proposals by Colorado electric utilities to fund, and
construct an Integrated Gasification Combined Cycle Project with CO2 capture and sequestration . SB
07-100 requires the designation of energy resource zones and the development of additional
transmission infrastructure to deliver energy from those zones to the load center of the utility. Decision
No. C08-0929 (Hr. Ex. 37), at 2-5, Proceeding No. 07A-447E (mailed Sept. 19, 2008).

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Planning, and the LCP Rules became the ERP Rules. The Commission explained that

these new ERP Rules put in place a bifurcated ERP review and approval structure,

providing that our new ERP Rules establish a framework for the Commission to

approve a plan for resource acquisition in Phase I, similar to the previous LCP Rules,

but add a Phase II process wherein the Commission weighs the various risks and

benefits of proposed resources to establish a preferred resource portfolio. 6 In moving

through this approval process, the ERP Rules further require the Commission to

evaluate and consider various public policy preferences and goals and incorporate them

into the ultimate selection of resources in the Phase II portion of the ERP process. 7

Rule 3601 defines the purpose and goals of an ERP, which include minimizing the

present value of revenue requirements (PVRR) while giving the fullest possible

consideration to the cost-effective implementation of new clean energy and energy-

efficient technologies. 8 These public policy preferences have developed over time

along with the ERP process, but some of the core concepts delineated by the

Commission in the 2007 ERP, i.e., balancing carbon reduction with customer costs and

integration of renewable resources while maintaining system reliability, remain as

relevant today as these issues were when the ERP Rules came to be nearly a decade

ago.

6
Decision No. C08-0929 (Hr. Ex. 37), at 7, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
7
See, e.g., Decision No. C08-0929 (Hr. Ex. 37), at 8, Proceeding No. 07A-447E (mailed Sept. 19, 2008)
(As part of the ERP process, the Commission must consider various goals such as balancing carbon
reduction with consumer cost increases, and maximizing new renewable resources without compromising
system reliability. As discussed in detail below, we intend for the Phase II process to provide sufficient
information for the Commission to consider all aspects of supply-side and demand-side resources and all
benefits and risks of the various proposals.)
8
4 C.C.R. 723-3-3601.

2
It is against this backdrop, with the ERP Rules modified since 2007 but with the

initial Phase I and Phase II architecture still in place, that the Company has brought

forward its 2016 ERP for review and approval by the Commission. Rule 3617(c)

governs the Commissions charge in evaluating the 2016 ERP and issuing a Phase I

decision:

If the record contains sufficient evidence, the Commission shall


specifically approve or modify: the utility's assessment of need for
additional resources in the resource acquisition period; the utility's plans
for acquiring additional resources through an all-source competitive
acquisition process or through an alternative acquisition process;
components of the utility's proposed RFP, such as the model contracts
and the proposed evaluation criteria; and, the alternate scenarios for
assessing the costs and benefits from the potential acquisition of
increasing amounts of renewable energy resources, demand-side
resources, or Section 123 resources. 9

Accordingly, Phase I sets the quantitative parameters and methodologies to be applied

in the quantitative and qualitative assessment of power supply proposals that occurs

during the Phase II process. 10 The Phase I decision requires (1) determination of the

methodology to derive the resource need, and (2) establishment of guidelines (i.e.,

modeling inputs, assumptions, methodologies and scenarios, and approval of relevant

studies) for use in the Phase II competitive solicitation. Following the Phase I decision,

the Phase II competitive solicitation and bid evaluation process commences with

issuance of the RFP. The Phase II process culminates with the issuance of the 120-

9
4 C.C.R. 723-3-3617(c); see also Decision No. C08-0929 (Hr. Ex. 37), at 51, Proceeding No. 07A-
447E (mailed Sept. 19, 2008) (specifying the Commissions obligations pursuant to Rule 3613(c), which is
now Rule 3617(c)).
10
See Hr. Tr. IV, at 158:8-17 (Feb. 6, 2017) (comments from Chairman Ackermann: At some point we
are moving from quantitative to qualitative and different parties I think are trying to impress upon the
Commission how and where and how fast to move into the qualitative arena. We are looking for
substance, guidance, directive under that of when and where do we have the basis to move from
quantitative to qualitative when we are setting forth those parameters under which the Applicant is going
to go forth into procurement. It would be helpful to keep that framing in mind as well.)

3
Day Report that contains the Companys bid evaluation. 11 Below we address the

appropriate scope of an ERP, past Commission decisions regarding the 2007 ERP and

2011 ERP and their role in this proceeding, and the policy context of this 2016 ERP. 12

We further provide suggested decision points drawing from Rule 3617(c) and prior

proceedings. Following this background to set the stage and frame the 2016 ERP, the

SoP moves through a more systematic discussion of the decision points in this Phase I

process.

A. ERPs focus on procurement of resources to fill incremental needs.

Rule 3610 establishes a methodology that makes clear the purpose of an ERP is

to determine and fill incremental resource needs, and the rules title, Assessment of

Need for Additional Resources, further supports this conclusion. 13 The methodology

requires the utility to sum the electric energy and demand forecasts and the planning

reserve margin developed pursuant to Rule 3605 and Rule 3607, respectively, and then

subtract the existing level of generation resource capacity provided pursuant to Rule

3607. The result is the incremental resource need to be filled through the Phase II

competitive solicitation process for the period of time covered by the resource

acquisition period (RAP).

Like many areas of public utility regulation, the determination of the resource

need to be filled in a particular ERP is not always as simple as applying the

11
Decision No. C08-0929 (Hr. Ex. 37), at 9, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
12
See Hr. Tr. IV, at 156:11-14 (Feb. 6, 2017) (comments from Commissioner Koncilja: I am also looking
for some suggestions as to whether or not these previous decisions in ERPs are something that you
really want us to keep applying, and maybe we have to do that in a separate proceeding.)
13
4 C.C.R. 723-3-3610 (By comparing the electric energy and demand forecasts developed pursuant
to rule 3606 with the existing level of resources developed pursuant to rule 3607, and planning reserve
margins developed pursuant to rule 3609, the utility shall assess the need to acquire additional resources
during the resource acquisition period.)

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methodology in Rule 3610. The need for additional generation resources may be the

result of customer load growth, as contemplated in Rule 3610, or the result of a

reduction in generating resources due to contract terminations or utility proposals to

retire existing generation resources (at the end of their useful lives or earlier). These

early retirements may be voluntarily proposed by the utility or brought forward due to

regulatory issues or directives from the General Assembly. For example, in the 2007

ERP the Company voluntarily brought forward a proposal to retire certain Company-

owned coal-fired generation resources and replace the capacity with a Company-owned

gas-fired generation resource. 14 The Commission explicitly recognized, however, that

this proposal and filling the resource need created by the proposed retirements required

additional determinations in addition to the ERP Rule requirements . 15 The

Commission granted Public Services request to retire the coal-fired generation

resources, 16 and the Commission approved utility ownership of the replacement

14
Tr. II, at 245:7-15 (Feb. 2, 2017) (hearing testimony from Company witness Mr. Hill: In '07, the
company proposed retiring Arapahoe 3, Arapahoe 4, Cameo 1 and Cameo 2. I use the term kind of as a
package deal. Two of those units were actually scheduled to go down, in the RAP the RAP in that ERP
went through 2015. So, the company came forth, offered up the concept of retiring those four units, and
then building a new combined cycle plant to basically replace that capacity and energy at the Arapahoe
site.)
15
Decision No. C08-0929 (Hr. Ex. 37), at 9, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (In this
Phase I Decision we determine resource needs, procurement specifications, and set the modeling
assumptions and scenarios to establish how Public Service and the IE will compare resources. Public
Service has requested that we also make certain additional determinations in addition to the ERP Rule
requirements, such as whether to retire certain coal plant resources, to assess imputed debt impacts, to
consider the merit of a utility ownership percentage for new resources, to consider a proposed 850 MW
limit on intermittent resources, and to consider a proposal for an interim filing in 2009 or 2010.)
16
Decision No. C08-0929 (Hr. Ex. 37), at 111, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (The
retirement of the Arapahoe and Cameo plants presents an excellent opportunity to reduce carbon.
Considering the age and relative inefficiency of the coal plants at issue, we find that the value of the
reduction of CO2 emissions outweighs the small cost savings achieved by the continued operation of the
Cameo and Arapahoe plants. Public Services plan proposes relatively aggressive increases in
renewables and DSM, and when combined with the retirement of the two coal plants, we find that Public
Service has made a significant effort to reduce carbon emissions.)

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capacity. 17 A Phase II competitive solicitation was also conducted to fill the incremental

resource need in that proceeding.

Similarly, the resource need filled in the 2011 ERP was not just limited to the

incremental resource need derived from the Rule 3610 methodology. Two coal-fired

generation resource retirements and the replacement of the associated capacity were at

issue in that proceeding stemming from the requirements of HB 10-1365, known as the

Clean Air-Clean Jobs Act (CACJA). 18 The Commission ultimately approved the

retirement of Arapahoe 4, a coal-fired generation resource, in the 2011 ERP, and the

Companys proposal to enter into a power purchase agreement (PPA) with an

independent power producer (IPP) to replace this capacity (as well as a natural gas

17
Decision No. C09-1257, at 28, 84, Proceeding No. 07A-447E (mailed Nov. 6, 2009) (Public Service
has demonstrated that the proposal contemplating utility ownership is more cost-effective than the
alternatives. Most importantly, the IE performed an independent assessment of the issue and confirmed
that, as modeled, the ownership option is cost effective. Further, as the Commission has found in Phase I,
there are benefits associated with both utility ownership and PPA options. The large number of bids
submitted, covering a large range of technologies, confirms that Independent Power Producer bidding in
Colorado is indeed quite rigorous. We find that Public Services ownership proposal, as modeled, is cost
effective even without considering the less tangible benefits of utility ownership.) The ownership
proposal in this proceeding involved the replacement capacity for the retiring coal-fired generation
resources as well as a percentage of the incremental resource need. The utility ownership proposal was
evaluated by the Commission in its entirety. See Decision No. C08-0929 (Hr. Ex. 37), at 178,
Proceeding No. 07A-447E (mailed Sept. 19, 2008) (We are inclined to maintain a reasonable balance of
utility and IPP ownership, and we agree that the ownership percentages proposed by Public Service are
clearly intended to strike such a balance. We also agree that the percentage amounts proposed by Public
Service will help the utility trend towards a balance that is similar to its peer utilities. Further, we are aware
that Public Service proposed the Cameo and Arapahoe plant retirements for carbon reduction purposes,
well before any federal or state mandates require such reductions. We agree that, under these
circumstances, it would be appropriate for the utility to own the replacement capacity for the closed coal
plants. Although CIEA and CEC make a good point that many coal plant retirements may be necessary in
the future, we find that this situation is unique as the plants are not retired for immediate compliance
purposes. This is an unusual case, and does not set a precedent for future plant retirements.)
18
Decision No. C13-0094 (Hr. Ex. 39), at 165, Proceeding No. 11A-869E (mailed Jan. 24, 2013) (citing
Decision No. C10-1328, 116 and stating [a]s part of its all-source solicitation, Public Service proposes
to review bids for the potential replacement power for the Cherokee 4 and Arapahoe 4 units. This
proposal, according to the Company, is consistent with Commission requirements specified in Decision
No. C10-1328, Docket No. 10M-245E, issued December 15, 2010, regarding Public Services emission
reduction plan filed pursuant to 40-3.2-201 through 40-3.2-210, C.R.S., the Clean Air Clean Jobs
Act .); Tr. II, at 245:21 246:13 (Feb. 2, 2017) (hearing testimony of Company witness Mr. Hill
regarding CACJA requirements and the 2011 ERP).

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sales agreement). 19 The proposal to replace the Company-owned Arapahoe 4 unit with

a PPA was proposed by Public Service through a standalone application, which was

eventually consolidated with the 2011 ERP proceeding. 20

Both of these prior instances involved proposals by the Company to retire and

replace utility-owned generation resources. 21 No prior ERP has involved a bottoms up

look at the existing generation fleet mandated by the Commission, where existing utility-

owned and IPP-owned resources not slated for retirement or contract expiration within

the RAP are evaluated for potential early retirement or termination and replacement sua

sponte by the Commission. 22 This type of analysis goes beyond the scope of the ERP

Rules, as recognized by the Commission in the 2007 ERP. 23

The scope of an ERP and the focus on incremental resource needs in the ERP

Rules is a fundamental concept in this proceeding, as certain parties have proposed

going beyond incremental resource needs and procuring resources to potentially

replace at-risk coal-fired generation resources that have not been proposed by the

Company for retirement or brought forward for retirement pursuant to a legislative


19
Decision No. C13-0094 (Hr. Ex. 39), at p. 4, Proceeding No. 11A-869E (mailed Jan. 24, 2013) ([T]he
Commission approves Public Services proposed contracting for the output from the facilities at the
Arapahoe Station owned and operated by Southwest Generation Operating Company, LLC. The
Commission determines that, despite initial questions surrounding the means by which Public Service
and Southwest Generation entered into the proposed transaction, the result is a cost-effective, ten-year
purchased power agreement with additional savings for customers from the associated natural gas sales
agreement between the Company and Southwest Generation); Decision No. C13-1566 (Hr. Ex. 41), at
33, Proceeding No. 11A-869E (mailed Dec. 20, 2013).
20
Decision No. C13-0094 (Hr. Ex. 39), at 33, Proceeding No. 11A-869E (mailed Jan. 24, 2013)
(outlining the requested relief sought through the Companys application in Proceeding No. 12A-785E).
21
Hr. Tr. II, at 244:22 246:17 (Feb. 2, 2017) (testimony of Company witness Mr. Hill regarding the
circumstances of the 2007 ERP and 2011 ERP).
22
Hr. Tr. II, at 263:6-13 (Feb. 2, 2017) (testimony of Company witness Mr. Hill regarding the purpose of
ERPs and his experience in ERPs).
23
Decision No. C08-0929 (Hr. Ex. 37), at 9, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (In this
Phase I Decision we determine resource needs, procurement specifications, and set the modeling
assumptions and scenarios to establish how Public Service and the IE will compare resources. Public
Service has requested that we also make certain additional determinations in addition to the ERP Rule
requirements, such as whether to retire certain coal plant resources .) (emphasis added).

7
directive from the General Assembly, as was the case in the 2007 ERP and 2011 ERP,

respectively. 24 This proposal is discussed more specifically later in this SoP. However,

as a high-level matter, the forced retirement of any existing resource, whether utility-

owned or IPP-owned, and replacement of the resource through the ERP is outside the

scope of the ERP and contrary to the ERP Rules unless: (1) the utility voluntarily

proposes early retirement and replacement of the utility-owned resource (as in

Proceeding No. 07A-447E); (2) the General Assembly directs early retirement and

replacement of the utility-owned resource (as in Proceeding No. 11A-869E); (3) the IPP

proposes early termination of a PPA and/or early retirement of an IPP-owned resource;

or (4) the utility-owned resource or the IPP-owned resource will reach the end of its

useful life (and will not be life extended) or contract term during the RAP.

B. Prior Commission ERP decisions establish relevant principles.

On the final day of hearing in this proceeding, the Commission asked parties to

address whether the findings in previous Commission ERP decisions should continue to

be applied as the Commission evaluates the 2016 ERP. 25 Public Service understands

why the Commission raised this question, given the disagreements between the parties

with regard to, among other things, the appropriate application of the annuity method

and the use of the Gas Price Volatility Mitigation (GPVM) Adder, which span multiple

ERP proceedings. However, the Company believes these disputed issues represent

24
See Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 11:7-11 (filed Jan. 30,
2017) (The Commission should direct PSCo to procure sufficient resources to replace a portion of
PSCos potentially at-risk coal-fired generation when acquiring new generation as a hedge against the
risk of retirement of these resources before the end of their useful lives. To this end, the Commission
should adopt 25% of this at-risk coal-fired generation capacity as a procurement target in this
proceeding.)
25
Tr. IV, at 156:11-14 (Feb. 6, 2017) (comments of Commissioner Koncilja).

8
the exception and not the rule. 26 Prior Commission decisions regarding the 2007 ERP

process in Proceeding No. 07A-447E and the 2011 ERP process in Proceeding No.

11A-869E explain how Colorado has moved from least-cost planning to a resource

planning process that incorporates public policy preferences while still seeking to

minimize the PVRR of selected resource portfolios. 27 These prior Commission

decisions provide findings on issues germane to every ERP process, and the Company

believes it is appropriate to look to these past decisions and build upon them as

opposed to setting them aside in their entirety. The appropriate application of the

annuity method and the GPVM Adder are two decision points that would benefit from

clarity in the Phase I decision in the instant proceeding. However, the issues and

disputes surrounding these two discrete issues should not be viewed as indicative of

broader problems in these prior decisions that require a holistic departure from the

findings contained therein.

C. The policy context of this 2016 ERP.

As we move through the Phase I process and into the Phase II process, an

understanding of the policy context in which the Company operates is essential to the

evaluation of the ERP. Public Service has identified the significant uncertainties at play

in this proceeding going back to the initial filing of the ERP in May 2016, and these

uncertainties remain. In Public Services direct case, Company witness Ms. Jackson

outlined a convergence of issues facing the Company due to an energy environment in

26
For example, the incremental nature of ERP proceedings is embedded in Commissions Rules 3601,
3602(c), 3607, 3610(a), and 3611(a), as discussed later in this SoP, whereas the annuity tail and GPVM
issues are not.
27
See, e.g., Decision No. C08-0929 (Hr. Ex. 37), at 2-15, Proceeding No. 07A-447E (mailed Sept. 19,
2008) (providing background on the development of the ERP Rules).

9
transition. 28 Some factors affect electric demand, such as uncertainty surrounding

future oil and gas loads and the outcome of the pending Commission proceeding

involving components of the Advanced Grid Intelligence and Security (AGIS)

initiative. 29 In addition to uncertainty regarding future demand, there is regulatory

uncertainty surrounding future environmental regulation given the stay of the Clean

Power Plan (CPP) by the U.S. Supreme Court and the recent change in presidential

administration in Washington, D.C. This uncertainty must be balanced with other policy

factors, including the significant near-term no regrets opportunities to procure cost-

effective eligible energy resources due to the extension of the Production Tax Credit

(PTC) and Investment Tax Credit (ITC). 30

Further, the Company is operating in an environment where generation

technologies are rapidly changing as eligible energy resources become least cost and

storage technologies become more cost-effective. And among it all, the Company must

manage a shifting resource mix, rendering issues such as maintenance of adequate

Flex Reserves integral to the reliable operation of the system. 31 As prior Commissions

have done in evaluating previous ERPs filed by the Company, the Commission must

frame the policy context of the 2016 ERP and weigh the various policy factors

discussed above in constructing a framework for the Phase II analysis. 32

28
Direct Testimony of Alice K. Jackson (Hr. Ex. 1), at 21:15-16 (filed May 27, 2016).
29
Direct Testimony of Alice K. Jackson (Hr. Ex. 1), at 21:16 22:13 (filed May 27, 2016).
30
Direct Testimony of James F. Hill (Hr. Ex. 3), at 35:7-9 (filed May 27, 2016).
31
Supplemental Direct Testimony of Drake T. Bartlett (Hr. Ex. 9), at 12:23 13:2 (filed Nov. 15, 2016).
32
See Decision No. C08-0929 (Hr. Ex. 37), at 9, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (In
this Phase I decision, we weigh the statutory directives, climate change concerns, constraints on Phase II
analysis, utility needs, competitive concerns, and public interest issues such as cost and rate impacts to
construct a proper framework for the Phase II analysis.)

10
D. Phase I decision points and considerations.

In the discussion above, this SoP sets forth the requirements for the Phase I

decision pursuant to Rule 3617(c). Additionally, there are a set of decision points and

considerations inherent in making the findings required by the ERP Rules. 33 These

decision points and considerations, in a proposed order of assessment, are as follows:

Determining the resource need and RAP;

Ensuring the stage is set for a robust Phase II competitive solicitation;

Determining the modeling parameters, assumptions, and methodologies to be

applied in the evaluation of the incremental resources needed to satisfy the

resource need;

Approving the studies that support certain of these parameters and

assumptions;

Determining appropriate scenarios and sensitivities for evaluation in the

Phase II bid evaluation process;

Determining the appropriate role of the Independent Evaluator (IE) during

the Phase II competitive solicitation; and

Addressing select miscellaneous issues arising in this proceeding.

Consistent with these proposed decision points and considerations for the Commission,

the following section discusses them in turn.

33
Hr. Tr. IV, at 148:5 149:3 (Feb. 6, 2017) (comments of Chairman Ackermann regarding decision
points in the Phase I process and use of these decision points in moving through deliberations to a Phase
I decision in this proceeding).

11
III. KEY DECISIONS AND CONSIDERATIONS IN THIS ERP

This section discusses the seven decision points set forth above and includes the

Companys recommended outcomes on each point.

A. The resource need determination.

In this ERP proceeding, as in past ERP proceedings, there are disputes among

the parties over discrete, specialized, and sometimes complex modeling input and

assumption issues. Amidst these disputes, however, the parties have generally come

to agreement on the paramount finding required in a Phase I decision, i.e., the

incremental resource need to be filled through the Phase II process. 34 The approach to

determining the resource need, as well as the corresponding 8-year RAP and 39-year

Planning Period, should be approved by the Commission.

i. The consensus approach to evaluating the resource need

In its rebuttal case, the Company proposed to provide low, medium and high

resource need scenarios, and affiliated portfolios of resources to fill these resource

need scenarios, in the 120-Day Report in this proceeding. 35 Company witness Ms.

Jackson explained that this approach gives the Commission different levels of resource

needs and corresponding resource portfolios to evaluate and allows the Commission

to decide upon the need scenario that is in the best interest of customers based on the

most recent facts and circumstances relating to the factors affecting the Companys

resource need in this proceeding. 36 The Company proposed to use four categories of

uncertainty to determine the low, medium, and high resource needs, and Table JFH-4 in
34
4 C.C.R. 723-3-3601 (The purpose of these rules is to establish a process to determine the need for
additional electric resources by electric utilities subject to the Commissions jurisdiction and to develop
cost-effective resource portfolios to meet such need reliably.)
35
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 31:14-16 (filed Jan. 30, 2017).
36
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 31:16-21 (filed Jan. 30, 2017).

12
the rebuttal testimony of Company witness Mr. Hill (reproduced below) 37 set forth the

adjustments to loads and resources that the Company proposed be used to develop the

range of resource needs:

Assumption Low Need Medium Need High Need

Most recent at the time Most recent at the time Most recent at the time
Demand forecast
of Phase II of Phase II of Phase II
Residential &
Commercial
300 MW peak demand 150 MW peak demand 50 MW peak demand
(R&C) rate design
reduction by 2023 38 reduction by 2023 reduction by 2023
changes1

150% of estimated 100% of estimated peak 50% of estimated peak


IVVO peak demand reduction demand reduction demand reduction
(66 MW) (44 MW) (22 MW)

50% of estimated load 100% of estimated load 150% of estimated load


Oil and Gas Load
growth (90 MW) growth (180 MW) growth (270 MW)

50% of estimated load 100% of estimated load 150% of estimated load


Electric Vehicles
growth (5 MW) growth (10 MW) growth (15 MW)

Resulting Year
~0 MW ~275 MW ~530 MW
2023 Need2

Notes:
1. Assume zero MW peak reduction for low, medium, and high if AGIS/AMI not approved.
2. Based on the Fall 2016 demand forecast and not including the 101 MW Diversity Exchange
as a supply side resource. Resource need will change with changes in demand forecast.

This approach differs from the approach used in prior ERPs where a single MW

estimate of resource need was used, then updated prior to commencement of the

37
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 24:1 (filed Jan. 30, 2017).
38
Company witness Ms. Jackson provided extensive testimony at hearing explaining the derivation of the
R&C rate design numbers in the low, medium, and high resource need scenarios and how these numbers
compare to those filed in the AGIS proceeding. Hr. Tr. I, at 142:9 143:8 (Feb. 1, 2017).

13
Phase II competitive solicitation. 39 Here, to account for uncertainty and provide

flexibility to the Phase II process, a low, medium, and high number would be used and

updated prior to commencement of the Phase II solicitation. 40

Staff moved for permission to provide surrebuttal testimony on the low, medium,

and high resource need range proposal, which was granted by the Commission. The

surrebuttal testimony of Staff witness Ms. Erin ONeill added additional process and put

a finer point on select aspects of the Companys proposed approach. Specifically, Ms.

ONeill recommended that the Commission adopt the low, medium, and high resource

need approach and [a]ccept the four categories of uncertainty detailed in Table JFH-

4. 41 Ms. ONeill addressed an additional uncertainty relating to the potential City of

Boulder municipalization in her testimony, but ultimately found that [c]onsidering that

there will be no certainty regarding Boulders departure from the Public Service system

until sometime in 2019, it is necessary that Public Service continue to plan to serve
42
Boulders electric needs in this ERP proceeding. Accordingly, Staff did not

recommend that this additional uncertainty be added as a category in Table JFH-4.

Ms. ONeill also recommended a process by which the Company would file the

updated low, medium, and high resource need calculations prior to commencement of

the Phase II competitive solicitation along with supporting documentation for the update.

Staff and the Company discussed the scope of this supporting documentation and

agreed that the Company will provide: (1) a time series forecast; (2) an update on the
39
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 15:4-7 (filed Jan. 30, 2017).
40
Hr. Tr. II, at 195:14-17 (hearing testimony of Company witness Mr. Hill).
41
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 2:9-12, 9:20-22 (filed Jan. 30, 2017) (Staff
believes the low, medium and high resource need scenarios represent an appropriate path forward based
on what is known at this time. The results provided by those analyses will provide a range of results that
may be considered by the Commission.)
42
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 9:4-6 (filed Jan. 30, 2017).

14
status of the AGIS proceeding (which affects the first two categories of uncertainty in

Table JFH-4); (3) the spring 2017 demand forecast; and (4) the oil and gas forecast. 43

Intervenors in this proceeding would then have two weeks to file comments on the

updates, with such comments strictly limited to the calculations related to the four

categories and not other Phase I issues. 44 The Company would have two weeks to

respond to these comments. Staff then recommended that the Commission issue a

decision approving or modifying the levels of resource need within three weeks, and the

Phase II solicitation would commence in due course following the Commission

decision. 45

Ms. ONeill noted the Companys support of the low, medium, and high resource

need approach, as modified by the Staff process, in her surrebuttal testimony. 46 In

addition, at hearing the Company offered to host a meeting for intervenors to ask

questions following its initial filing of the low, medium, and high resource need a week

after the filing date as an additional component of the review process. 47

In an attempt to reach consensus prior to hearing, the Company surveyed the

parties to determine the level of support for the low, medium, and high resource need

approach. At hearing, Company counsel informed the Commission that, in addition to

Staff, the approach was also supported by OCC, CEO, WRA, CIEA, SWG, sPower,

Vote Solar, Climax, RMELC, and IREA. Only Interwest, COSEIA, CEC, and the City of

43
Hr. Tr. II, at 47:22 49:12 (Feb. 2, 2017) (hearing testimony of Ms. Jackson regarding the scope of
supporting documentation agreed upon with Staff in discussions prior to hearing).
44
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 7:1-10 (filed Jan. 30, 2017).
45
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 7:11-15 (filed Jan. 30, 2017).
46
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 10:9-12 (filed Jan. 30, 2017).
47
Tr. II, at 49:13-19 (Feb. 2, 2017). The proposed updating process, with comments and a potential
meeting for parties to ask questions about the update, provides a significant amount of new process and
gives the parties an opportunity to review, confer and ultimately weigh in regarding the low, medium, and
high resource need range.

15
Boulder expressed concern with the approach, and Local 111 and Invenergy did not

provide a formal position. 48 Accordingly, there is general consensus among the parties

in support of this low, medium, and high resource need range approach.

To illustrate how the proposed approach will unfold, and pursuant to the request

of Commission counsel, the Company has prepared a timeline premised upon Figure

2.9-1 in Volume 2 of the ERP, but revised to include the low, medium and high resource

need update process and estimated dates of this process and other key Phase II

procedural milestones. 49 This figure is included as Attachment B to this SoP. The

Company will still provide its annual progress report required pursuant to Rule 3618(a)

no later than October 31, 2017, which will give the Commission and parties a look at the

currently projected resource need at that time. The 120-Day Report follows after the

annual progress report, and in the 120-Day Report the Company will recommend both a

preferred resource need scenario (i.e., low, medium, or high) and a preferred portfolio to

fill the applicable need from the recommended scenario. 50 The Company will likely

have more clarity at the time the 120-Day Report is filed with regard to the R&C rate

design and IVVO categories in Table JFH-4, which will further assist with selecting the

most appropriate resource need scenario for the Commissions evaluation. 51

48
Hr. Tr. I, at 23:5-22 (Feb. 1, 2017).
49
Company witness Ms. Jackson and Commission counsel walked through the proposed schedule in
detail at hearing. Hr. Tr. I, at 145:1 152:12 (Feb. 1, 2017).
50
Hr. Tr. II, at 253:5-7 (Feb. 2, 2017).
51
Hr. Tr. II, at 252:12-17 (Feb. 2, 2017) (hearing testimony of Company witness Mr. Hill: I would imagine,
by the time we get to actually filing the 120-day report with the Commission, we would very likely know
the outcome of the advanced grid proceeding. So that will help inform what we recommend, as far as a
level to pursue, medium, low, high.)

16
Given the general consensus among the parties and the flexibility the low,

medium, and high resource need approach will provide, the Company believes this

approach should be approved by the Commission.

ii. The RAP and Planning Period

Rule 3602(n) defines the RAP and allows utilities to select a RAP of between six

and 10 years, while Rule 3602(k) defines the Planning Period and allows for selection of

a Planning Period of between 20 and 40 years. 52 The Company proposed an 8-year

RAP and a 39-year Planning Period. No party opposed the selected Planning Period

and only CIEA raised concerns about the RAP. Company witness Mr. Hill explained the

factors the Company balanced in selecting the 8-year RAP, which runs through the

summer peak of 2023, and Section 1.3 of ERP Volume 1 provides additional support for

the proposed RAP. 53 The Company developed an 8-year RAP after balancing factors

relating to the extension of the PTC and ITC and ensuring that the time period allows

bids for newly constructed generation resources to compete with proposals from

existing generation resources, as this will provide an added level of discipline to the

Phase II competitive solicitation. 54 Moreover, this RAP is generally consistent with past

ERPs. An 8-year RAP was used in the 2007 ERP and a 7-year RAP was used in the

2011 ERP. 55

Only CIEA raised concerns with the length of the RAP, with the apparent goal of

increasing the resource need by adding additional years to the RAP. A longer RAP and

increased resource need may be beneficial to IPPs, but Company witness Mr. Hill

52
4 C.C.R. 723-3-3602(k); 4 C.C.R. 723-3-3602(n).
53
Corrected Attachment AKJ-1, at 1-28 1-29 (Hr. Ex. 1) (filed Jan. 30, 2017).
54
Direct Testimony of James F. Hill (Hr. Ex. 3), at 11:20 13:11 (filed May 27, 2016).
55
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 27:8-11 (filed Jan. 30, 2017).

17
explained that extending the RAP to the maximum 10 years can harm customers.

Specifically, extending the RAP beyond the proposed 8 years could result in power

supply providers hedging against equipment and labor cost increases by including a

premium into their proposal pricing. This type of outcome would be unfavorable to

customers. 56 Mr. Hill further noted that the potential for negative customer impacts in

the form of high bid prices has driven the selection of RAPs in the 7- and 8-year range

in prior ERPs. 57 The 8-year RAP therefore is long enough to ensure that bids for new

generation resources can bid into the Phase II competitive solicitation, while

simultaneously protecting customers from the inclusion of potential equipment and labor

cost premiums, leading to higher costs. It also fits well with the forthcoming 2019 ERP,

where the resource need in 2024 and beyond can be evaluated within a new RAP. This

will allow bidders in the 2019 ERP to offer projects with in-service dates closer to the

proposal date. 58 This further mitigates the concern expressed above regarding the

inclusion of premiums when there is a significant time lag between the proposal and in-

service date in the 2019 ERP.

The fact that another ERP and resource acquisition process will commence in

2019 obviates CIEA witness Mr. Monsens argument that an 8-year RAP will leave IPPs

56
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 29:14-17 (filed Jan. 30, 2017).
57
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 29:17-19 (filed Jan. 30, 2017).
58
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 27:16 28:2 (filed Jan. 30, 2017)
(The Company would consider a 2024 and beyond resource need as part of its next ERP cycle which is
expected to initiate in the fall of 2019. If that 2019 ERP proceeds along a schedule similar to the 2011
ERP, the Phase II acquisition process should be completed and a Commission Phase II decision
rendered a little less than two years from the filing date. As discussed on page 1-29 of Attachment AKJ-1,
this would allow approximately 31 months to construct new generation facilities to meet a 2024 resource
need, which allows adequate time to develop a variety of generation technologies, including gas-fired CT
or CC 1 facilities, as well as wind and solar PV.)

18
in limbo beginning in 2024. 59 In support of a longer RAP, CIEA through cross

examination noted that the construction time for a new gas-fired combined cycle unit

could exceed the 31-month time frame that would be allowed to fill the summer 2024

need in the 2019 ERP. 60 The Companys alternative plan modeling, however,

demonstrated how the addition of renewable resources along with gas-fired combustion

turbines is a more cost-effective way to meet the resource needs versus additional gas-

fired combined cycle resources. 61 As a result, CIEAs concern that sufficient time be

allowed in the 2019 ERP to build new combined cycle units is moot. Moreover, and

notwithstanding that additional combined cycle resources are not needed on the system,

such resources could be added through the 2019 ERP by summer 2025. Given that a

combined cycle unit has a 40-year useful life, its long-term value to the system would

not be impacted if such a unit were placed in-service in 2024 or 2025. The 8-year RAP

strikes this appropriate balance among all of these factors while also accounting for the

next ERP filing, and therefore it should be approved by the Commission.

The 39-year Planning Period should similarly be approved because it is

structured to match the 2015 to 2054 dimensions of the Strategist model used for Phase

II bid evaluation. 62 The Company uses this 39-year dimension to give as far a look into

59
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 61:5 (filed Jan. 30, 2017);
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 27:8-12 (filed Jan. 30, 2017).
60
Hr. Tr. II, at 144:15 146:22 (Feb. 2, 2017) (exchange between CIEA counsel and Company witness
Mr. Hill).
61
See Corrected Attachment AKJ-1, at 1-44 (Hr. Ex. 1) (filed Jan. 30, 2017) (showing Table 1.5-2, where
the combination of wind and combustion turbines of alternative plan 2 have costs that are $440 million
less than alternative plan 1 (which includes a new combined cycle resource)).
62
Corrected Attachment AKJ-1, at 1-29 (Hr. Ex. 1) (filed Jan. 30, 2017).

19
the future as possible within existing storage capabilities of the Strategist model. 63 This

Planning Period in turn provides the Commission with a long-term look into the future in

evaluating the bids received through the Phase II competitive solicitation, and further

accounts for current PPAs expiring outside of the RAP. 64 Accordingly, the Company

believes a 39-year Planning Period is reasonable and requests Commission approval of

this unchallenged Planning Period.

B. Setting the stage for a robust Phase II competitive solicitation.

The Phase I decision should set the parameters for a robust and successful

Phase II competitive solicitation that attracts a diverse set of viable and cost-effective

power supply proposals representing both utility-owned and IPP-owned facilities. This

section addresses key considerations for the Commission to ensure that the Phase II

competitive solicitation achieves these ends.

i. Capital and O&M costs for utility ownership bids

The interplay between utility ownership and IPP ownership is an issue in every

ERP, and this 2016 ERP is no different. In fact, it is particularly important in this

proceeding because this Phase II competitive solicitation will likely see bids for utility

ownership of gas, wind, solar, and other technologies through a variety of ownership

structures. Therefore, it is important to avoid adoption of parameters that prejudice any

63
Hr. Tr. II, at 218:25 219:12 (Feb. 2, 2017) (hearing testimony of Company witness Mr. Hill regarding
the relationship between Strategist modeling and the Planning Period, in addition to the storage
capabilities of Strategist.)
64
Mr. Monsens related argument that the RAP fails to account for wind PPA expirations in the 2026-2028
timeframe is also without merit. Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at
62:18 63:8 (filed Jan. 30, 2017). As explained by Company witness Mr. Hill in his rebuttal testimony,
[t]he Companys proposed Phase II bid evaluation process spans the 39 year planning period of 2016-
2054 and, as a result, will reflect the wind PPA expirations in the 2026-2028 timeframe that Mr. Monsen
cites. Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 28:14-16 (filed Jan. 30,
2017). These expirations will therefore be accounted for in the Phase II bid evaluation process.

20
specific offering. The goal in this Phase I is to set the stage to receive the best utility

ownership and IPP PPA bids in the Phase II competitive solicitation and obtain the most

beneficial and cost-effective result for customers.

With that overarching goal in mind, CIEA has made one recommendation that

could affect the ability to receive the most competitive bids by artificially limiting the pool

of bids. CIEA witness Mr. Monsen argues that the Company should be held to, or in his

parlance be required to live with, capital and O&M cost estimates associated with any

bid in the Phase II competitive solicitation for either (1) utility-owned generation, or (2)

projects that will be owned by the Company pursuant to a build-transfer arrangement. 65

This proposal should be rejected by the Commission. As explained in the rebuttal

testimony of Company witness Ms. Jackson, Mr. Monsens argument may have some

attraction if it is viewed as one of equivalency in evaluating IPP bids and bids for utility-

owned generation resources. But that is a superficial argument that fails to account for

the regulatory compact and traditional utility ratemaking, and also fails to account for the

key differences between the two types of projects. 66

The regulatory compact defines the relationship between utility commissions,

utilities, and customers. 67 By capping recovery of utility ownership projects at any

capital cost or O&M cost bid amount, CIEAs proposal automatically disallows any costs

65
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 13:6-14 (filed Jan. 30, 2017).
66
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 52:15-19 (filed Jan. 30, 2017).
67
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 53:30-18 (filed Jan. 30, 2017)
(citing United States Gypsum, Inc. v. Ind. Gas Co., 735 N.E.2d 790, 797 (Ind. 2000) where the Indiana
Supreme Court summarizes the regulatory compact: The bedrock principle behind utility regulation is the
so-called regulatory compact, which arises out of a bargain struck between the utilities and the state.
As a quid pro quo for being granted a monopoly in a geographical area for the provision of a particular
good or service, the utility is subject to regulation by the state to ensure that it is prudently investing its
revenues in order to provide the best and most efficient service possible to the consumer. At the same
time, the utility is not permitted to charge rates at the level which its status as a monopolist could
command in a free market. Rather, the utility is allowed to earn a fair rate of return on its rate base.)

21
incurred in excess of the bid amount regardless of the surrounding circumstances. This

obviates the regulatory compact under which regulated utilities and this Commission

have operated for decades in Colorado. Under the regulatory compact, if costs above a

bid amount are incurred, these costs would be evaluated by the Commission in a

proceeding and approved if determined prudent and denied if determined imprudent. 68

CIEA provides no compelling basis upon which to abandon this traditional ratemaking

approach and transform capital and O&M costs bid for utility ownership projects into

hard cost caps for future cost recovery purposes.

A more appropriate approach, and one that will not negatively affect the bid pool

by potentially chilling the offering of utility ownership proposals, is to follow past ERP

decisions and require that any bid for utility ownership include a point cost for capital

costs. While the point cost does not establish a hard cost cap that cannot be exceeded

under any circumstances, the Commission has been clear in past ERPs that [w]e

expect this point cost cap level to be the maximum amount that is used in future cost

recovery proceedings, absent extraordinary circumstances.69 Under this approach, the

Company bears the burden of establishing the existence of extraordinary circumstances

in any future rate proceeding. 70 CIEA has not provided any persuasive reason to

68
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 53:26 54:2 (filed Jan. 30,
2017). Mr. Monsen conceded this process for review is in place in Colorado in response to discovery
from the Company, noting in part that [t]he Commission has the authority to review any and all utility-
related costs in a general rate case. Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex.
2), Attachment AKJ-10 (filed Jan. 30, 2017) (CIEA response to PSCO 3-6).
69
Decision No. C08-0929, 189, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
70
Hr. Tr. I, at 54:4-8 (hearing testimony of Company witness Ms. Jackson: And so that rate case process
would look at what was the cost that the company presented as would be the capital cost associated with
constructing that facility that was selected in the Phase II process, as compared to what was the actual
cost incurred? Any deviation above the dollar amount that was presented in the Phase II, the company
would have to present evidence to show why there was extraordinary circumstances for those costs that
were incurred to be included in rate base.)

22
deviate from this past approach, and the use of a point cost for capital cost for bid

evaluation purposes will not chill or prejudice the offering of bids for utility ownership.

With regard to O&M costs, the Company will develop an O&M cost to accompany

any bid for utility ownership. 71 Indeed, the Company Ownership RFP included in

Attachment AKJ-3 provides a form for bidders to provide O&M costs for build-transfer

bids. 72 Whether this form is completed or not, subject matter experts within Public

Service will develop an O&M cost over the life of the asset to be considered for bid

evaluation purposes. 73 It is not appropriate, however, to convert this developed O&M

cost into a hard cost cap on O&M. Rather, as with the capital costs used for the bid

evaluation, these costs will be evaluated in future rate cases. If these costs do in fact

exceed the estimates, they can be evaluated by the Commission during the rate case

proceeding and the Commission can determine if the cost were prudently incurred. 74

This approach is consistent with the regulatory compact and should be adopted by the

Commission.

By approving this bid evaluation approach, the Commission will help ensure that

utility ownership and IPP ownership proposals for all generation types will respond to

the Phase II competitive solicitation. It will also provide for both the capital and O&M

cost components of any utility ownership bid to be considered and thus evaluated on a

level playing field with IPP ownership bids, which will also reflect all-in costs.

71
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 66:16 67:8 (filed Jan. 30,
2017).
72
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), Attachment AKJ-3 (Corrected
Attachment 3-4.2, Form D1-2) (filed Jan. 30, 2017).
73
Development of these costs by Company personnel is appropriate given the Company will ultimately
own the facility and be responsible for this O&M. Corrected Revised Rebuttal Testimony of Alice K.
Jackson (Hr. Ex. 2), at 67:2-4 (filed Jan. 30, 2017).
74
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 67:12-15 (filed Jan. 30, 2017).

23
ii. Benefits and risks of PPAs and utility-owned generation

Each type of generation (i.e., IPP-owned and utility-owned) that may be selected

in Phase II offers benefits to customers, and there is value in ensuring bidders offer both

types of proposals into a Phase II competitive solicitation. Based upon the tenor of

CIEA witness Mr. Monsens testimony, it appears that CIEA would prefer a bidding

process where only IPPs could participate and thus not have to compete against bids

for utility ownership in the Phase II competitive solicitation. 75 The foundation of this

position, however, is not sound.

At the outset, this position is contrary to CIEAs own interests as CIEA members

are often the beneficiary of utility ownership through build-transfer type of arrangements

or asset sales to the utility. Build-transfer bids, while technically utility ownership

proposals, offer substantial business opportunities for IPPs. In addition, PPAs are not

superior to utility-owned projects from a risk perspective, and PPAs are not risk-free for

customers. 76 When a utility enters into PPA negotiations with an IPP following a

competitive solicitation and the negotiations are ultimately unsuccessful, it does not

follow that customers are unharmed, contrary to cross-examination conducted by CIEA

counsel at hearing. 77 The logic of this argument, i.e., that because no payments were

75
See generally Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 12:1 12:21
(filed Jan. 30, 2017) (explaining the purposes of Mr. Monsens testimony, which include instituting hard
cost caps on utility ownership bids and artificially shortening the book lives of utility ownership bids to
make them less competitive in the Phase II bid evaluation process.)
76
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 55:11-14 (filed Jan. 30, 2017)
(Underlying Mr. Monsens proposal appears to be the idea that PPAs with IPPs are risk-free for
customers. That is not the case, and should be kept in mind when evaluating proposals, like Mr.
Monsens here, that can affect the competitiveness and general viability of utility-owned projects, whether
the project is a utility self-build or acquired through a build-transfer or similar commercial arrangement.)
77
Hr. Tr. I, at 67:21 68:1 (Feb. 1, 2017) (questions from CIEA counsel: And so I believe that we've
established, then, that for your examples where these IPPs have abandoned their projects, there was no
payments made by the company to these IPPs, and therefore no payments -- no cost to ratepayers that
stem from payments made to those IPPs .)

24
made pursuant to the PPA, customers are left in no worse a position than before

negotiations commenced, reflects a myopic view of the generation procurement process

and energy markets generally. When PPA negotiations with an IPP are unsuccessful,

the utility is left with a resource need that it must fill on a short timeline due to time lost

through negotiations. 78 This can, and to be sure it has, resulted in the procurement of

resources priced above market to fill the resource need in short order. 79 This result

harms customers in the form of higher cost generation. Accordingly, PPAs carry risks

for customers notwithstanding whether a PPA is executed and payments are made

pursuant to it.

At the same time, utility-owned projects offer certain benefits to customers that

cannot be offered by IPPs. A unique benefit for customers related to utility-owned

generation is the fact that this generation is priced based on the cost of service model.

As a result, at the end of the book life of the utility-owned asset, customers are afforded

utility-owned capacity at costs well below that of a PPA. 80 Moreover, if actual costs

come in below estimated costs with utility-owned generation, then customers receive

the benefits of the reduced costs. 81 PPAs do not offer either of these benefits to

customers. To the contrary, if actual costs are below the amount contracted for in the

PPA, then this is pure profit to the IPP. 82 In the same vein, if a PPA term ends, the IPP

78
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 57:8 58:8 (filed Jan. 30,
2017) (providing several recent examples of situations where PPA negotiations failed to result in
execution of a PPA).
79
Hr. Tr. I, at 69:19-24 (Feb. 1, 2017) (hearing testimony of Company witness Ms. Jackson: So in the
event that we rely upon a PPA for delivery of the energy and then that energy is not delivered, then that
risk still remains on the shoulders of the company to go out and satisfy so that we don't have a dip in our
reliability or our obligation to serve our customers.)
80
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 56:8-10 (filed Jan. 30, 2017).
81
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 56:12-14 (filed Jan. 30, 2017).
82
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 56:10-12 (filed Jan. 30, 2017).

25
may bid the project back in at whatever price the market will bear and is not restricted,

as is the case with a regulated utility, to the assets cost of service. IPP projects do not

become fully depreciated assets that can continue to operate on the Companys system

at low cost to customers. 83

These diverse benefits of IPP and utility-owned generation support the

proposition that the Commission should not place constraints on either type of bid that

would preclude or limit the offering of both bid types into the Phase II competitive

solicitation. Nor should the Commission be distracted by assertions about who currently

owns the largest wind or gas facility on the Public Service system. 84 Rather, the Phase

II competitive solicitation is strictly about getting the best IPP and utility-ownership bids

consistent with the goals of Rule 3601.

iii. The Companys proposed book lives

The Company proposed the following book lives for gas, wind and solar

resources owned by the utility for use in the bid evaluation process 85:

Resource Type
Gas-Fired CT or CC 40 years
Solar 30 years
Wind 25 years

83
See Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 56:4-7 (filed Jan. 30,
2017) (I do not fault IPPs for building in a return on investment, as this is fundamental to them running a
profitable enterprise. Nevertheless, we need to recognize that PPAs are not cost of service contracts.)
84
Hr. Tr. I, at 79:25 - 82:5 (Feb. 1, 2017) (cross-examination from CIEA counsel of Company witness Ms.
Jackson regarding whether Cherokee 5, 6, and 7 and the Rush Creek Wind Project were the largest
natural gas combined cycle and wind facilities, respectively, on the Public Service system.) The
Company later clarified that the largest natural gas combined cycle on the Public Service system is
located at Fort St. Vrain. Hr. Tr. IV, at 5:24 6:1 (Feb. 6, 2017).
85
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 54:11 (filed Jan. 30, 2017).

26
CIEA witness Mr. Monsen argued for shorter book lives, specifically stating that the

Environmental Protection Agencys (EPA) book life estimates of 30 years for gas and

20 years for solar and wind are more accurate. 86 Mr. Monsen testifies that using too

long of a book life will understate the costs of a utility-owned resource. This argument

fails for two reasons. First, the Companys book lives are reasonable and consistent

with industry standards. The Company established the reasonableness of these book

lives for each generation resource type in the rebuttal testimony of Company witness Mr.

Hill. 87 Second, the implicit but sole purpose of Mr. Monsens proposal is to deviate from

typical utility book lives to make utility ownership proposals less competitive by

spreading their costs over a shorter period of time. This should be rejected for public

policy reasons because the proposed book lives are consistent with lives recently

approved by this Commission for utility-owned gas and wind assets. 88 Further,

arbitrarily shortening lives could lead to intergenerational inequities. CIEAs arguments

throughout this proceeding and past ERPs are replete with references to avoid unfair

competitive advantages as between utility ownership and IPP ownership proposals; the

unreasonable shortened book lives proposed by Mr. Monsen cut directly against that

proposition. The Commission should reject CIEAs argument for shorter book lives and

adopt the industry standard book lives proposed by the Company for use in the Phase II

competitive solicitation.

86
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 42:8 (filed Jan. 30, 2017).
87
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 54:16 55:22 (filed Jan. 30,
2017).
88
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 54:12 55:22 (filed Jan. 30,
2017).

27
iv. RFPs and model contracts

Consistent with Rule 3604(i), the Company filed its proposed RFPs and model

contracts for approval by the Commission. Only a single issue regarding the bid

evaluation process pursuant to these RFPs was raised in this proceeding during the

cross-examination of Company witness Mr. Hill by counsel for Interwest. Interwest

counsel questioned whether the process for selecting bids to be advanced to computer

modeling on Page 2-221 of ERP Volume 2 created a preference for utility ownership

bids. 89 There is no preference, as explained by Company witness Mr. Hill, and the

process is instead designed to evaluate projects for viability before advancing them to

the computer modeling stage. 90 Outside of this issue, which appears to stem from a

misunderstanding of the proposed process, there were no objections to any other

provisions of the RFPs or model contracts. Accordingly, these documents should be

approved by the Commission. They have been carefully structured to allow for a fair

and robust Phase II competitive solicitation.

C. Determining the modeling parameters.

An ERP involves numerous modeling inputs and assumptions, which are set

forth in Section 2.7 of ERP Volume 2 and broken down into over 30 items or

categories. 91 The Company initially filed its modeling assumptions for this ERP on

89
Hr. Tr. II, at 160:3 164:1 (Feb. 2, 2017); Corrected Attachment AKJ-2, at 2-221 (Hr. Ex. 1) (filed Jan.
30, 2017).
90
Hr. Tr. II, at 249:16 250:1 (Feb. 2, 2017) (hearing testimony of Company witness Mr. Hill: There is no
preference. The preference that we have is we want to make sure we move projects forward that are --
we really think are viable. Because what we don't want to have happen is move something forward,
evaluate it, and it becomes part of a preferred portfolio. And, then, we basically, as we move through time,
we get closer and closer to when that capacity needs to hit the system, and, for whatever reason, either it
can't be built or it's not something that's feasible anymore, and we'll come up short.)
91
Corrected Attachment AKJ-2, at 2-180 2-209 (Hr. Ex. 1) (filed Jan. 30, 2017).

28
February 29, 2016 in Proceeding No. 16A-0138E. 92 Section 2.7 clarifies which of these

assumptions were updated between the initial filing on February 29, 2017, and the filing

of the ERP on May 27, 2016. From this initial filing through the hearing in this ERP

proceeding, a time period spanning nearly a year, few of these modeling inputs and

assumptions (including the studies underlying these assumptions) have come into

dispute among the parties. Accordingly, before delving into the modeling issues in

dispute in this proceeding, the Company notes that there is consensus or no opposition

to the majority of the modeling inputs and assumptions. This section of the SoP largely

focuses on modeling inputs and assumptions in dispute among the parties, e.g., the

appropriate application of the annuity method, the GPVM Adder, carbon proxy pricing,

the four-source blend natural gas price forecast, the 6.78% discount rate, and the

surplus capacity credit. We also address the general modeling capabilities of Strategist,

given that this was an issue during the hearing, and bids for energy storage, which were

a key topic at the public hearing conducted on February 1, 2017.

i. Annuity method

The CIEA-proposed use of the annuity method and its application in ERP

proceedings have a long, confusing, and controversial history dating back to the 2007

ERP. The difficulties surrounding the application of the annuity method manifested itself

in multiple ways in this proceeding, stemming from Public Services discussion of the

92
Corrected Attachment AKJ-2, at 2-180 (Hr. Ex. 1) (filed Jan. 30, 2017). Proceeding No. 16A-0138E
was closed without approving any of these modeling inputs and assumptions on June 21, 2016. See
Decision No. C16-0552, at 2, Proceeding No. 16A-0138E (mailed June 21, 2016) (This Decision
addresses how the Commission and interested persons and parties to other related proceedings will have
opportunities to review the technical inputs and assumptions to Public Services Electric Resource Plan
(ERP), including certain studies that were not available on February 29, 2016, when Public Service filed
the Application. Specifically, we adopt the recommendations made by Public Service and other parties to
this Proceeding to consider such studies, technical inputs, and assumptions in other proceedings.)

29
past application of this filler method in ERP Volume 1, which resulted in further

confusion at the hearing. 93 Confusion has not just reigned among parties to ERP

proceedings; even the IE in the 2011 ERP found that using the annuity method to

provide a reasonable low-cost bookend is not entirely straightforward . 94 Staff

witness Ms. Podeins testimony at hearing provided another illustration of the confusion

around the application of the annuity method. Indeed, when asked how an annuity tail

should be applied to a utility ownership proposal, she responded [t]hat is a good

question .95 The fact of the matter is that the annuity method is not clear and is not

well-defined. To the extent the Commission wishes to continue to use it as one filler

method bookend (with the other bookend being the more straightforward replacement

method), then the Commission should take the opportunity in this proceeding to clarify

the principles of the annuity method and, in doing so, resolve what it actually is and

what it is not. 96

93
See, e.g., Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 36:19 37:9 (filed Jan.
30, 2017) (There has never been a detailed discussion or description of how the annuity method would
actually be applied in the evaluation of Phase II bids in the 2007, 2011, and 2016 ERPs. This lack of
clarity was evident in the Independent Evaluators (IE) report in Proceeding No. 11A-869E at page 19,
which stated: However, using the annuity method to provide a reasonable low-cost bookend is not
entirely straightforward and thus we do not fault the Public Service approach. This is also evident in the
2011 ERP Phase II bid evaluation in which, out of an abundance of caution and lack of clarity, the
Company applied the annuity method by extending all PPA terms to the end of the planning period
regardless of whether a Company-owned resource of the same technology had been offered into the
solicitation. Upon reflection, the Company should not have simply extended all PPAs to the end of the
planning period as this is not consistent with the annuity method first proposed by CIEA in the 2007 ERP)
(emphasis added).
94
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 37:1-2 (filed Jan. 30, 2017).
95
Hr. Tr. III, at 176:23-25 (Feb. 3, 2017).
96
The Company provided background on the replacement method through both prefiled and hearing
testimony. Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 32:18 33:3 (filed Jan.
30, 2017) (The Companys proposed replacement method involved extending the life of the shorter PPA
bid at an estimated cost (i.e., the replacement cost) to reflect either continuation of service from the
shorter term PPA resource or the cost to replace the capacity and energy from that resource after its PPA
terminates); Hr. Tr. II, at 262:4-10, 17-22 (Feb. 2, 2017) (The replacement method, that's the company's
preferred approach. And what that would do, instead of having these annuity tails, what would there's
two components to which combustion turbine would backfill any capacity that results from the termination

30
a. Relevant background on the annuity method.

The annuity method, first advocated by CIEA in the 2007 ERP, is one method to

aid in the comparison between a utility-owned resource and a shorter term PPA of the

same generation technology by assuming that future PPA pricing will be identical to

current PPA pricing (i.e., the price offered in Phase II). The Company has argued

instead for an alternative method that uses the lowest-cost Company combustion

turbine proposal to backfill any capacity shortfall that would result in portfolios that

contain either PPA bids or Company proposals that do not extend to the end of the

planning period. 97 The Companys proposed method uses economic dispatch of the

remaining power supply system to backfill any lost energy that would result when

either PPA bids or Company proposals drop off prior to the end of the planning period. 98

As such, the Companys proposed approach of using CT costs to backfill capacity and

system energy to backfill energy is consistently applied to all bids whether they be IPP

PPA bids or Company proposals, thus focusing the analysis on the bid or proposals

themselves (i.e., letting the bids speak for themselves). This approach is known as the

replacement method. 99

Public Service is in compliance with the Commissions directive in Decision No.

C13-0094 that the Company present in its 120-Day Report bookends with a range of

costs to represent the boundaries of potential future prices for the replacement of

expiring bids, with Public Services proposed utility self-build combustion turbines and

of the PPA, or end of the term, and the system energy fills any energy needs . So, in that regard, the
back-end is the same for everything, CT, capacity system energy. And in that approach, I see that as the
bids speak for themselves, not the tails. We don't have the tails wag the dog. We have the bids, then,
speaking for how they impart value in that particular portfolio.)
97
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 16:8-12 (filed Jan. 30, 2017).
98
See Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 44:1-11 (filed Jan. 30, 2017).
99
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 32:13 33:3 (filed Jan. 30, 2017).

31
system energy approach (the replacement method) as one boundary, and the annuity

method as the other boundary. 100 The Company proposes to apply the annuity method

in this ERP by comparing utility-owned resources to shorter term PPAs of the same

generation technology by extending the life of the shorter term PPA so that it equals the

life of the utility resource. 101 The cost of this extended portion of the PPA will be

represented by the annuity cost of the PPA, which is consistent with Mr. Monsens

proposal. 102 In the case of follow-on PPAs from existing generation resources, the

Company will add an annuity tail that extends the total life of the associated generating

asset to 40 years for gas, 30 years for solar, and 25 years for wind resources. 103

This methodology proposed by the Company is, in fact, consistent with what Mr.

Monsen proposed in the 2011 ERP. Hearing Exhibit 75 is Mr. Monsens answer

testimony in the 2011 ERP proceeding, in which the following question and answer 104

(in relevant part) was provided:

Q. HOW SHOULD PSCO DEVELOP ESTIMATES OF THE COST OF


REPLACEMENT CAPACITY FROM EXISTING RESOURCES?

A. PSCo could use the results of bids received in the upcoming


procurement cycle following this docket to inform its assumptions
about PPA re-bid costs. For example, if an IPP project with an
expected life of 30 years is coming a 10 year PPA and is bidding for
a new 10 year PPA, it would be reasonable to expect that the
replacement costs for the remaining 10 years of its life after the end
of the second PPA term would be comparable to the current re-bid
for the second PPA.

100
Decision No. C13-0094 (Hr. Ex. 39), at 197, Proceeding No. 11A-869E (mailed Jan. 24, 2013).
101
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 41:15 42:6 (filed Jan. 30,
2017).
102
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 42:3-4 (filed Jan. 30, 2017).
103
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 47:19 48:2 (filed Jan. 30,
2017).
104
Corrected Answer Testimony of William A. Monsen (Hr. Ex. 75), at 17:18 18:3, 18:19-21, Proceeding
No. 11A-869E (filed Oct. 17, 2012) (emphasis added).

32
Only after all of the existing uncontracted capacity has reached the
end of their useful life would it be reasonable to use the cost of new
generation for backfilling at the end of a contract term during bid
evaluation.

This portion of Mr. Monsens 2011 ERP answer testimony (pages 17-18) was not

included in the excerpts included with Mr. Monsens testimony in this proceeding

(Attachment WAM-4 to Hearing Exhibit 29), necessitating the introduction by the

Company of Hearing Exhibit 75. 105 This excerpt shows that Mr. Monsen believed,

during the 2011 ERP, that the replacement method advocated by the Company is

appropriate to use once existing capacity reached the end of its useful life. Based on

his testimony in this proceeding, Mr. Monsen now believes that all resources should be

extended to the end of the planning period, regardless of whether that would exceed the

generators useful life, and should be priced using current PPA pricing (i.e., the price

offered in Phase II). 106

Mr. Monsen was right the first time. His new proposal in this case extends the

annuity tail to the end of the Planning Period makes no sense other than to favor IPP

bids. Extending the tail to the end of the Planning Period provides a lower average cost

for IPP bids because it is assumes the most recently bid IPP price may be extended,

whereas using the annuity method for extending the tail for utility ownership bids to the

end of the Planning Period makes no sense because the rate-based asset will be fully

depreciated (unless it is a gas-fired asset with a 40-year book life). What does make

sense is an apples-to-apples comparison of utility ownership and IPP bids of the same

105
Hr. Tr. IV, at 122:4 123:3 (Feb. 6, 2017) (hearing discussion surrounding the admission of Hearing
Exhibit 75 into the evidentiary record).
106
Hr. Tr. IV, at 130:12 131:12 (Feb. 6, 2017) (hearing testimony of CIEA witness Mr. Monsen).

33
technology by extending the tail only so far as to equalize the lives, as described in

more detail below.

b. The principles of the annuity method create a three-legged stool.

The annuity method is based upon three principles. 107 First, it seeks to compare

two alternatives with unequal lives, so the corresponding principle is to equalize the

asset lives for comparative purposes. Second, the annuity method was proposed by

CIEA as a methodology for comparing utility ownership bids (i.e., utility self-builds or

build transfer bids) with shorter term PPA bids from IPPs. Third, the bids being

compared must be of the same technology (e.g., wind, solar, or gas). Problems ensue

when circumstances surrounding the application of the annuity method do not satisfy all

of these principles, and for that reason the annuity method stands on a three-legged

stool.

There is support both in the record in the instant proceeding and the history of

the annuity method in prior ERPs for each of these three principles. Mr. Monsen

himself outlined the first principle in the 2007 ERP. When asked in his answer

testimony what method he recommended Public Service and the Commission use

when evaluating PPA and utility-owned resources, Mr. Monsen responded as follows: I

would recommend using the Equivalent Annual Cost Method, otherwise known as the

Annuity Method, when comparing alternatives with unequal lives. 108 Mr. Monsen also

established the second principle in the 2007 ERP. In a section of his answer testimony

107
Hr. Tr. II, at 261:10-14 (Feb. 2, 2017) (hearing testimony of Company witness Mr. Hill: The three
principles, again, so we make sure we understand what we're talking about, is the comparison between
company ownership projects, with shorter term PPAs of the same technology, and you want to equalize
the lives.)
108
Staffs Comments on PSCos 2013 120-Day Report (Hr. Ex. 71), at Appendix E, 16:8-12 (answer
testimony of William A. Monsen in Proceeding No. 07A-447E) (emphasis added).

34
entitled Use Annuity Method for Evaluating Bids Rather than Speculative Post-PPA

Replacement Costs, the first sentence of his answer to the first question in the section

stated [w]hen a bid evaluator compares a utility-owned resource to a shorter term PPA

using post PPA replacement costs there is potential for bias in the assessment. 109

Furthermore, Mr. Monsen made his recommendation to use the annuity method in

response to a question seeking a filler method to use when evaluating PPA and utility-

owned resources . 110 The annuity method was therefore introduced to this

Commission based upon the notion that its use was necessary to compare utility

ownership proposals with shorter-term PPA proposals from IPPs. It necessarily follows

that if there is not a utility ownership bid, then use of the annuity method is unnecessary

because the potential for bias in evaluating the two different bid types that initially

concerned Mr. Monsen in 2007 cannot exist where the comparison involves only PPA

bids versus other PPA bids.

The third principle, i.e., that the annuity method should be used to compare bids

of the same generation technology, is supported by the financial literature setting forth

the parameters of the equivalent annual cost method, from which Mr. Monsen originally

derived the annuity method in the 2007 ERP. The literature establishes that application

of the method should be limited to situations involving: (1) either-or choices that are

mutually exclusive of one another; 111 (2) a situation where a firm must choose

109
Staffs Comments on PSCos 2013 120-Day Report (Hr. Ex. 71), at Appendix E, 15:15-18 (answer
testimony of William A. Monsen in Proceeding No. 07A-447E) (emphasis added).
110
Staffs Comments on PSCos 2013 120-Day Report (Hr. Ex. 71), at Appendix E, 16:9-10 (answer
testimony of William A. Monsen in Proceeding No. 07A-447E) (emphasis added).
111
PSCo Response to Discovery Request CIEA 8-1 (Hr. Ex. 58) (citing Brealey, Richard A. and Myers,
Stewart C. Principles of Corporate Finance Fourth Edition McGraw-Hill, Inc. (1991) p. 107).

35
between two machines of unequal lives that do exactly the same job 112 or can do the

same job; 113 or (3) alternatives that accomplish the same purpose but that have

unequal lives. 114 Within this context of evaluating power supply bids, the job is not

simply the ability to generate electricity, but rather the manner in which that electricity is

produced, as well as the ability of a generator to provide ancillary and other services to

the electric system. For example, gas-fired combined cycle units provide dispatchable

energy and capacity, gas-fired combustion turbines units provide dispatchable capacity,

and wind and solar facilities provide non-dispatchable generation (e.g., spinning

reserves or flex reserves), each with unique and widely different daily and seasonal

generation profiles that impact the generation portfolio differently. Indeed, at hearing

Staff witness Ms. Podein acknowledged the different operating characteristics between

gas, wind, and solar generating resources. 115 Moreover, the Boston Pacific Company,

Inc. paper included with Mr. Monsens answer testimony in this proceeding as

Attachment WAM-7 (entitled Bid Evaluation Methods in Competitive Solicitations: A

White Paper on Techniques Used to Evaluate Power Supply Proposals with Unequal

Lives and prepared on behalf of a large IPP, Calpine Corporation) further supports the

proposition that the annuity method should only be used to compare bids of the same

generation technology type. 116 The example used in the paper of the application of the

112
PSCo Response to Discovery Request CIEA 8-1 (Hr. Ex. 58) (citing Brealey, Richard A. and Myers,
Stewart C. Principles of Corporate Finance Fourth Edition McGraw-Hill, Inc. (1991) p. 109).
113
PSCo Response to Discovery Request CIEA 8-1 (Hr. Ex. 58) (citing Ross, Stephen A., Westerfield,
Randolph W., and Jaffe, Jeffrey. Corporate Finance Fifth Edition, Irwin.(1999) p. 175).
114
PSCo Response to Discovery Request CIEA 8-1 (Hr. Ex. 58) (citing FE Review Manual, 3rd Edition By
Michael R. Lindeburg, PE).
115
Hr. Tr. III, at 157:16-25 (Feb. 3, 2017).
116
See Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), Attachment WAM-7 (filed
Jan. 30, 2017). This same paper was also cited in Mr. Monsens answer testimony in the 2007 ERP.

36
annuity method compares two gas-fired combined cycle units not a gas-fired

combined cycle unit and a solar generating resource or a wind generating resource, or
117
even a gas-fired combustion turbine, for that matter. The same generation

technology was used in the example because of the distinct operating characteristics of

the selected generation technology, and this underscores that a principle of the annuity

method is that must be used to compare two proposals of the same generation

technology. 118 To do otherwise would lead to nonsensical and absurd results.

c. The Companys proposed application of the annuity method


satisfies the three principles.

In its rebuttal case, Public Service conceded that its application of the annuity

method in the 2011 ERP missed the mark, where out of an abundance of caution and

lack of clarity, the Company applied the annuity method by extending all PPA terms to

the end of the planning period regardless of whether a Company-owned resource of the

same technology had been offered into the solicitation.119 Company witness Mr. Hill

acknowledged that this application was not consistent with the annuity method first

proposed by CIEA in 2007 and it failed to comport with the three principles of the

annuity method outlined above.

But the Companys proposed application of the annuity method as set forth in Mr.

Hills rebuttal testimony does satisfy the three principles of the annuity method. Figure

Staffs Comments on PSCos 2013 120-Day Report (Hr. Ex. 71), at Appendix E, Note 12 (answer
testimony of William A. Monsen in Proceeding No. 07A-447E).
117
See Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), Attachment WAM-7, at 2-3
(filed Jan. 30, 2017).
118
See Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 37:11-12 (filed Jan. 30,
2017) ([T]he annuity method is to be used for comparison of a Company-owned project with a shorter
term PPA of the same technology.)
119
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 37:4-7 (filed Jan. 30, 2017).

37
JFH-7 120 illustrates the proposed application of the annuity method and is excerpted

below:

ERP Planning Period


2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
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A New 25-year Company owned Wind
B New 20-Year IPP Wind PPA Annuity Tail
C New 15-Year IPP Wind PPA Annuity Tail
D New 10-Year IPP Wind PPA Annuity Tail

E New 30-year Company owned Solar


F New 25-Year IPP Solar PPA Annuity Tail
G New 20-Year IPP Solar PPA Annuity Tail
H New 15-Year IPP Solar PPA Annuity Tail

I New 40-year Company owned Gas CT/CC


J New 25-Year IPP Gas CT/CC PPA Annuity Tail
K New 20-Year IPP Gas CT/CC PPA Annuity Tail
L New 15-Year IPP Gas CT/CC PPA Annuity Tail
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Asset/PPA Life

This approach equalizes the lives of each generation technology type. Wind has

25 years, solar has 30 years, and gas has 40 years, consistent with the book lives

proposed for use with utility-owned generation in this proceeding. 121 This satisfies the

first principle. In each instance, there is a bid for utility ownership and a PPA bid for

each generation technology type. This satisfies the second principle. And finally,

annuity tails are only added to compare proposals of the same generation technology.

This satisfies the third principle.

120
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 43:5 (filed Jan. 30, 2017).
121
See Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 54:11 (filed Jan. 30, 2017)
(Table JFH-5 showing in part the book lives proposed by the Company).

38
The Companys approach to the annuity method should therefore be approved

by the Commission for application in the Phase II bid evaluation process. It satisfies

each leg of the three-legged stool necessary for proper application of this filler method.

d. CIEAs application of the annuity method is flawed and fails to


satisfy the three annuity method principles.

CIEAs construction of the annuity method has evolved over the past decade,

with the most recent evolution taking place during the live testimony of CIEA witness Mr.

Monsen in this ERP. 122 In doing so, it has gone far afield from the three principles of

the annuity method, two of which were initially established by Mr. Monsen himself in the

2007 ERP. CIEA argues that the annuity tail should be applied to all PPA bids and

extended through the end of the planning period, regardless of generation technology

type and regardless of whether a bid for utility ownership has been submitted for that

particular generation technology type. 123 This violates all three principles of the annuity

method. First, its approach creates unequal lives for purposes of comparison with a

utility ownership bid if the utility ownership bid is for wind (25-year book life) or solar (30-

year book life). This violates the first principle. Second, its approach applies the

annuity method regardless of whether there is a utility ownership bid for the particular

generation technology type. This violates the second principle. Third, its approach

uses the annuity method to compare resources of different generation technology types.

This violates the third principle. Accordingly, CIEAs application of the annuity method

has evolved to become directly contrary to principles initially espoused by their own

122
Hr. Tr. IV, at 128:7 131:12 (Feb. 6, 2017) (hearing testimony of CIEA witness Mr. Monsen).
123
Hr. Tr. IV, at 130:13-21 (Feb. 6, 2017) (hearing testimony of CIEA witness Mr. Monsen). Staff takes a
similar position in this proceeding. Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 17:19 18:2
(filed Dec. 9, 2016).

39
witness (the first and second principles) or well-established in financial literature

referred to by CIEAs own witness (the third principle). 124

e. CIEAs application of the annuity method leads to absurd results.

Company witness Mr. Hill illustrated some of the absurd results that flow from the

application of the annuity method as proposed by CIEA. For example, Figure JFH-8

(excerpted below) in Mr. Hills rebuttal testimony showed a hypothetical gas-fired

resource with a 15-year PPA that follows on a 25-year PPA. 125 If the annuity tail is

extended to the end of the Planning Period, it would look as follows:

ERP Planning Period


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A Follow on 15-Year PPA w/Existing Gas CT/CC Annuity Tail
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Asset/PPA Life

Under this hypothetical, the gas-fired asset in question is assumed to have a 60-year

life, well beyond the 40-year book life used by the Company for utility ownership

proposals 126 and twice that of the 30-year life Mr. Monsen recommended be used in

evaluating useful lives of utility ownership gas bids based on the book lives used by

EPA. 127 The same can be true with a renewable resource. If, for example, a wind

resource coming off a 15-year PPA is bid into the Phase II competitive solicitation with a

124
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), Attachment WAM-7, at 1, note
4 (filed Jan. 30, 2017) (citing Ross, Stephen A., Westerfield, Randolph W., and Jaffe, Jeffrey. Corporate
Finance Fourth Edition Irwin. (1996) p. 185.)
125
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 45:13 (filed Jan. 30, 2017).
126
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 45:10-12 (filed Jan. 30, 2017)
(Figure JFH-8 illustrates how application of the annuity method would result in this gas-fired resource
having a total life of 60 years (initial 25 year PPA + follow-on 15 year PPA + 20 year annuity tail.)
127
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 42:8 (filed Jan. 30, 2017).

40
10-year PPA, it could have up to a 25-year annuity tail applied to it. 128 At this point, the

modeling has assumed that the wind resource can last for 50 years, which is double its

book life of 25 years. 129 Mr. Monsen argued at hearing that there is evidence coming

forth that renewable resources are going to continue running after the book life that

was assumed at the time they were constructed but conceded that we dont have a lot

of examples. 130 While the Company does not dispute that repowering of renewable

resources is occurring in certain instances, there is not sufficient evidence in the record

in this proceeding, and perhaps at all, to support a 50-year life on a wind resource.

These results provide additional reasons why CIEAs approach should be

rejected by the Commission. The long useful lives under these scenarios also stand in

contrast to the short book lives advocated for by Mr. Monsen and discussed above. 131

128
Figure JFH-9 shows a similar scenario to this hypothetical. Corrected Revised Rebuttal Testimony of
James F. Hill (Hr. Ex. 4), at 46:13 (filed Jan. 30, 2017).
129
An additional absurd result that flows from this application of the annuity method is that the pricing in
the annuity tail could assume pricing that incorporates benefits from tax credits, and specifically the PTC
and ITC, that may no longer be available. Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex.
4), at 47:7-13 (filed Jan. 30, 2017) (Having the price of this 10-year PPA represent the pricing of the 15-
year annuity tail (as the annuity method does) could be unreasonable since the PTC is no longer
available to this facility. This could occur if the entire value of the earlier PTC had been fully utilized by the
25th year of operation, leaving no PTC value for any follow on PPAs. Said another way, application of the
annuity method in this example would inappropriately suggest this facility could continue to take
advantage of a tax credit for which it cannot.)
130
Hr. Tr. IV, at 17-23 (Feb. 6, 2017).
131
See, e.g., Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 46:8-12 (filed Jan. 30,
2017) (Figure JFH-9 illustrates how application of the annuity method would result in the wind PPA being
represented as having a total life of 40 years (initial 15 year PPA + follow-on 10 year PPA + 15 year
annuity tail ) which is twice as long as the 20-year useful life that Mr. Monsen argues in Answer
Testimony should be applied to wind resources.) The same issue arises with the 60-year gas asset
shown in Figure JFH-8. Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 45:16 - 46:3
(filed Jan. 30, 2017) (This example illustrates how the reasonableness of the annuity method begins to
break down when dealing with follow-on PPAs. This example also shows the inconsistency between Mr.
Monsens advocacy that the annuity method extend PPA lives to the end of the ERP planning period, with
his Answer Testimony that the useful life of gas-fired CT or CC facilities should be no longer than 30
years.)

41
f. CIEAs application of the annuity method gives rise to additional
issues and implementation questions.

There are additional issues created by CIEAs proposed approach to the annuity

method. Mr. Monsen appears to argue that the annuity method is preferable to the

replacement method and other filler methods because it has more certainty regarding

future pricing by simply repeating the PPA pricing over the period covered by the

annuity tail. 132 He testifies that [t]his is an advantage of the Annuity Method because

rather than relying on estimates of the future cost of capacity and energy prices, or the

cost to build future replacement generation, this approach lets the bids speak for

themselves. 133 But later in his answer testimony, Mr. Monsen contradicts this notion of

future cost certainty: The purpose of extending the bid of an IPP is to try to understand

the cost of replacement power after the IPPs initial PPA expires. The central question is:

After the initial term of a PPA, how would the IPP bid into a competitive solicitation?

The Annuity Method assumes that the IPP would not increase its bid in the future
134
relative to its expiring PPA. Accordingly, Mr. Monsens method is still relying an

estimate of future costs; it just uses a different future pricing estimate methodology than

that of the replacement method or another filler method.

Over the last 10 years, Mr. Monsens method has evolved from one that seeks to

allow comparison of utility ownership proposals with shorter term IPP bids for similar

generation technologies to an entirely new application in which all bids live for the full

132
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 24:11-14 (filed Jan. 30, 2017)
(Rather than relying on highly uncertain assumptions about costs once the initial term expires, the
annuity method uses only the bids themselves. Implicit in this method is the assumption that when the
PPA expires, the bid offer is repeated under similar terms.)
133
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 24:15-18 (filed Jan. 30,
2017).
134
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 27:7-10 (filed Jan. 30, 2017).

42
Planning Period based on arbitrary and speculative assumptions about future market

conditions. Under this application, the bids do not speak for themselves; rather, the

lengthy annuity tails based on arbitrary and speculative assumptions do all the talking.

There is no literature to document whether portfolios of bids that are evaluated in this

manner will result in realistic portfolio PVRR representations allowing for a proper

comparison of resource alternatives. In addition, Mr. Monsens future pricing estimate

methodology implicitly assumes the market at the time of renewal (i.e., when the initial

PPA expires) is oversupplied (either by energy, capacity, or both energy and capacity)

such that a project owner is willing to bid below the market cost of a new market entrant

to obtain a new contract. This is not supported by financial theory and inconsistent with

Mr. Monsens stated goal of letting the bids speak for themselves. 135 To the contrary,

this method contemplates evaluating todays bids using a speculative assumption about

market conditions well beyond the term actually being proposed by the bid.

If the Commission determines that Mr. Monsens current (yet ever-evolving)

construction of the annuity method should be applied to all bids through the end of the

Planning Period, then utility ownership proposals must also be extended to the end of

the Planning Period; however, the annuity method is inappropriate for this purpose. The

utility ownership proposals differ from IPPs in that the utility must bid and recover costs

based on cost of service, not what the market will bear. Once the cost recovery of a

utility owned project is complete over the projects book life, the Company does not

have the opportunity to rebid at market prices, whether higher or lower than its cost of

service. For this reason, any tail or extension applied to a utility ownership bid through

135
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 24:18 (filed Jan. 30, 2017).

43
the end of the Planning Period must be determined based on cost of service and not

market. Therefore, because capital recovery would be completed by the end of the

initially proposed book life, any tail must consist solely of a continuation of the O&M

costs associated with the utility ownership bid in question.

g. The Companys application of the annuity method should be


approved by the Commission.

As shown in this section, the Companys proposed application of the annuity

method is consistent with the three principles of the annuity method that tie back to the

2007 ERP and are grounded in financial literature. The Company believes the

Commission should take the opportunity presented in this proceeding to firmly establish

these principles of the annuity method and avoid the controversy surrounding the

application of the annuity method that has colored the last two Phase II competitive

solicitations. Public Service has presented an intuitive and reasonable application of

the annuity method with clear parameters. CIEAs current and ever-evolving approach

stands in contrast with absurd results flowing from the application of its annuity method

and a sharp deviation from the principles of the annuity method. For these reasons, it

should be rejected by this Commission once and for all.

ii. GPVM Adder

Since the LCP Rules transitioned to ERP Rules in 2007, ERP modeling has

accounted for potential future natural gas price volatility. 136 The Company proposes to

continue to use the GPVM Adder to account for this volatility in the Phase II bid

136
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 38:18-22 (filed Jan. 30, 2017)
(addressing the GPVM Adder and noting that the Company used this same basic methodology in the
2007 Colorado Resource Plan (Proceeding No. 07A-447E), the 2011 Electric Resource Plan (Proceeding
No. 11A-869E), the Clean Air Clean Jobs Act proceeding (Proceeding No. 10M-245E), DSM proceedings,
and the Rush Creek Wind Project proceeding (Proceeding No. 16A-0117E).)

44
evaluation in this proceeding. As explained in ERP Volume 2, [a] GPVM Adder is

added to the base natural gas forecast to account for potential volatility in the future

price of natural gas for use in evaluating the total cost of a natural gas-fired generating

facility. The Company is using $0.61/MMBtu, which is the recent cost of an at the

money NYMEX call option covering the 10-year period starting in 2016 as the proxy for

a GPVM Adder.137 Several concerns were raised by parties with regard to the GPVM

Adder, ranging from the basis for the $0.61/MMBtu value to allegations that parties have

never understood the basis for the GPVM Adder since its inception approximately a

decade ago. Moreover, Staff witness Ms. Lim, whose testimony was adopted by Staff

witness Ms. Podein, argued that the GPVM Adder was not necessary because potential

gas price volatility was addressed through the use of the Companys high and low gas

price sensitivities. 138

a. Upside natural gas price risk is real and must be addressed.

The fundamental inquiry to start with is whether gas price volatility is real, i.e.,

whether there is real upside natural gas price risk in todays market. The state of the

evidence in this proceeding shows that the answer to that question is yes. While Staff

opposes the inclusion of the GPVM Adder in modeling, it does not oppose it on the

basis that there is no volatility. Rather, Staff believes the Commission has other more

appropriate means to assess the level and potential impact of gas price risk associated

with various portfolios and suggests the high and low gas price sensitivities cover this

137
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-183 (filed Jan. 30, 2017).
138
Corrected Answer Testimony of Rebecca V. Lim (Hr. Ex. 17), at 4:19-21 (filed Jan. 27, 2017) (The risk
of high gas prices is captured by the high gas price scenario Strategist runs, just as the possibility of low
gas prices is characterized by the low gas price scenario Strategist runs.)

45
risk. 139 OCC witness Mr. Neil opposes the use of the GPVM Adder, but at the same

time concedes that gas price volatility continues to exist in the market. 140 Accordingly,

gas price volatility is real. Because gas price volatility continues to exist in the market,

an uncontested conclusion in this proceeding, the next question is what modeling

convention should be used to address this volatility.

Staff and OCC proposed alternative options to the Companys proposed GPVM

Adder. First, Staffs contention that the high and low gas price sensitivities address gas

price volatility is without merit. Company witness Mr. Scholl explained in his rebuttal

testimony that [t]he high and low gas sensitivity cases are useful to determine the

impact on PVRR should gas prices follow those paths for every year of the 2016 ERPs

planning period; but they do not, however, provide a measure of the impact of gas price

volatility on the Base Gas forecast. 141 The GPVM Adder and high and low gas price

forecasts measure different things. The high and low gas price forecasts provide a look

at a particular gas price future if prices stay generally high or generally low, respectively.

The GPVM Adder, on the other hand, puts a price on the removal of upside price

volatility year over year. 142 The high and low gas price sensitivities should therefore not

be treated as a surrogate for the GPVM Adder.

139
Corrected Answer Testimony of Rebecca V. Lim (Hr. Ex. 17), at 4:17-19 (filed Jan. 27, 2017).
140
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 42:18-19 (filed Jan. 30, 2017) (Gas price
volatility has declined substantially in the last few years. The need for a GPVM adder should be
reconsidered in light of recent decrease in gas price volatility.) In Figure CN-4A and Figure CN-4B, Mr.
Neil provides graphic illustrations of the decreased gas price volatility in the market. However, he does
not contend it does not exist. Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 43:1 44:7 (filed
Jan. 30, 2017).
141
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 40:7-11 (Hr. Ex. 8) (filed Jan.
30, 2017) (emphasis in original).
142
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 40:11-13 (Hr. Ex. 8) (filed Jan.
30, 2017).

46
OCC witness Mr. Neil argues for the removal of the GPVM Adder altogether, or

in the alternative for the use of a 5-year call option. 143 In the 2011 ERP, the

Commission ultimately ordered the use of a 5-year call option at a price of

$0.64/MMBtu. 144 Nevertheless, Mr. Neils recommendation should not be adopted.

First, the proposed GPVM Adder value of $0.61/MMBtu for a 10-year call option is lower

than the 5-year call option used in the 2011 ERP, and the price of this 5-year call option

in the 2011 ERP calls into question the value Mr. Neil placed on such an option in his

testimony of $0.0751/MMBtu. 145 Second, a 10-year call option is more appropriate

because it remains true to the purpose of the GPVM Adder, which is to try to put a

renewable generator-heavy portfolio and a gas-heavy portfolio on somewhat equal

footing. 146 Ideally, the Company would be able to obtain a 20-year or 25-year call

option to match the expected life or PPA term of a new renewable energy resource. 147

However, the 10-year call option is the longest call option readily available and the

Company therefore uses it to value the GPVM Adder.

b. The GPVM Adder has adjusted to changing market conditions over


time.

In evaluating the continued use of the GPVM Adder, the Commission should also

consider that the GPVM Adder value has not remained static; rather, it has changed

over time to reflect the level of volatility in the market. The Company initially proposed a

$0.86/MMBtu value for the GPVM Adder in the 2011 ERP and, as Staff witness Ms.

143
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 45:10-14 (filed Jan. 30, 2017).
144
Hr. Tr. III, at 59:9-23 (Feb. 3, 2017).
145
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 45:10-14 (filed Jan. 30, 2017).
146
Hr. Tr. III, at 60:3-5 (Feb. 3, 2017).
147
Hr. Tr. III, at 60:5-11 (Feb. 3, 2017) (hearing testimony of Company witness Mr. Scholl: And typically if
we were looking at incremental renewable generators, they are going to be for a period of 20 to 25 years.
And so, you know, we would really like to be able to find a longer term quote to better match that kind of
time frame; but that's really not a product that's really available, to my understanding.)

47
Podein acknowledged at hearing, the GPVM adder has decreased over time .148

The GPVM Adder has been adjusted over time to ensure it reflects the current state of

the market.

Parties in cross-examination at hearing raised concerns because the

$0.61/MMBtu value was obtained through a phone call to a natural gas trading

organization. 149 This is a function, as Commissioner Koncilja noted, of the fact that

obtaining these call options this far into the future is a primitive market because it's not

published on any exchange. 150 Obtaining pricing in this manner is consistent with

general business practices in this type of market, but the Company nevertheless

understands the concerns raised by Staff regarding providing support and putting

process around obtaining the GPVM Adder value. 151 Therefore, consistent with

Company witness Mr. Scholls representation at hearing during an exchange with

Chairman Ackermann, when the Company receives an updated value for a 10-year call

option on the NYMEX natural gas futures prior to commencement of the Phase II

solicitation, Public Service will document the phone call with a short memorandum and

148
Hr. Tr. III, at 173:18-23 (Feb. 3, 2017); Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex.
8), at 41:8-11 (Hr. Ex. 8) (filed Jan. 30, 2017) (For example, in Phase I of the 2011 ERP the Company
assumed a $0.86/MMBtu GPVM adder, in Phase II of the 2011 ERP the Company assumed a
$0.65/MMBtu adder, and in this ERP the Company assumes a $0.61/MMBtu adder, which reflects
decreased natural gas price volatility over time.)
149
Hr. Tr. II, at 273:6-19 (Feb. 2, 2017) (exchange between Staff counsel and Company witness Mr.
Scholl regarding the support for the $0.61/MMBtu value.)
150
Hr. Tr. III, at 46:20-23 (Feb. 3, 2017).
151
Hr. Tr. III, at 45:9-15 (Feb. 3, 2017) (hearing testimony of Company witness Mr. Scholl: This is a
phone call to these various parties that might be able to give us this type of a quote, but it's not a sheet
that they have got sitting in front of it them that says, Oh, well, today it this is it's something those
entities will came take back to their risk analysts and work up a quote at that time and then they will pick
up the call and give it back.)

48
share this document with the IE, if the Commission believes such a process is

appropriate. 152

c. There is not widespread confusion about the basis for the GPVM
Adder.

Finally, at hearing Staff witness Ms. Podein testified regarding her confusion as

to the difference between the GPVM hedging program (which is adjudicated in separate

application proceedings) and GPVM Adder in past ERP proceedings. The two are

different, as clearly explained in ERP Volume 2 (and quoted directly in Staff witness Ms.

Lims answer testimony): The use of the GPVM in the context of the ERP is a modeling

convention, and is not designed to represent the cost of the actions taken in the gas

price risk mitigation program. 153 Ms. Podein further implied at hearing the confusion

surrounding the difference between the GPVM hedging program and GPVM Adder was

widespread and that even the Commission itself did not understand the basis for the

GPVM Adder and what the modeling convention sought to address. 154 Ms. Podeins

argument is that the GPVM Adder was evaluated and approved on a false premise in

both the 2007 ERP and 2011 ERP, and therefore this Commission should depart from
152
Hr. Tr. III, at 46:9-16 (Feb. 3, 2017)(hearing testimony of Company witness Mr. Scholl: But I think we
can easily, if we get a Commission decision that lays out the process that you would like to see, I think
the independent evaluator in their role is probably the most straight forward way to ensure that we have
documentation in hand and we can show the IE documentation in hand as to the as to the quote or
quotes that we obtained prior to the issuance of the RFP.)
153
Corrected Answer Testimony of Rebecca V. Lim (Hr. Ex. 17), at 6:9-11 (filed Jan. 27, 2017); Corrected
Attachment AKJ-2 (Hr. Ex. 1), at 2-252 (filed Jan. 30, 2017) (The use of the GPVM in the context of the
ERP is a modeling convention, and is not designed to represent the cost of the actions taken in the gas
price risk mitigation program. The gas price risk mitigation program is short term in nature, seeking to
abate fuel cost risk for the upcoming heating season using a mix of financial contracts (such as call
options or futures contracts), long term supply contracts, and physical storage. By applying the GPVM to
the cost of natural gas, the model is adding the option premium (i.e. GPVM adder) so that natural gas is
now represented in the model as a known cost which is no longer subject to price changes. The
additional cost of the GPVM accounts for the risk premium associated with energy costs from natural gas
fired generation. Presenting natural gas a known quantity permits the fair comparison of costs over long
periods of time between those generation technologies which do not incur a fuel price risk such as wind
and solar against those generation technologies that do.)
154
Hr. Tr. III, at 193:24 194:25 (Feb. 3, 2017).

49
the longstanding tradition and practice of including the GPVM Adder as a modeling

input. 155

It is impossible to recreate the state of mind of the Commission in 2007, the

Commission in 2011, and each and every party to the 2007 ERP proceeding and the

2011 ERP proceeding. But the Company believes that Ms. Podein overstates any

confusion surrounding the GPVM Adder and its basis in past ERP cycles. Indeed, WRA

counsels comments at hearing regarding WRAs understanding of the GPVM Adder in

previous ERP proceedings illustrate this point. 156 The IE in the 2011 ERP also

concluded that that Public Service modeled the GPVM consideration consistent with

the directions in the Phase 1 order in its final report on the Phase II competitive
157
solicitation. The Company does not dispute that Ms. Podein may have

misunderstood the relationship, or the lack thereof, between the GPVM hedging

program and the GPVM Adder. The Company also regrets that this confusion for her

may have been created by the use of the same acronym for the two different

functions. 158 But these data points from WRA and the IE in 2011, as well as the

Commissions extensive discussion regarding the basis for the GPVM Adder in the 2007

ERP, show this confusion or misunderstanding was not shared in many quarters. 159

155
Hr. Tr. III, at 195:1 196:1 (Feb. 3, 2017).
156
Hr. Tr. III, at 196:10-17 (Feb. 3, 2017) (Comments of WRA Counsel Ms. Overturf at hearing: Your
Honor, I just want to clarify for the record that Western Resource Advocates has always understood what
the gas price volatility mitigation adder is and that it functioned as a modeling input rather than as a
reflection of the actual hedging programs that the Company undertook. So I just want to point out that at
least, you know, we knew in 2011.)
157
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-252, FN 27 (filed Jan. 30, 2017).
158
Corrected Answer Testimony of Rebecca V. Lim (Hr. Ex. 17), at 5:22-23 (filed Jan. 27, 2017) (Now
understanding that the Company has been using the term GPVM to represent two entirely different
things .)
159
Decision No. C08-0929 (Hr. Ex. 37), at 251-258, Proceeding No. 07A-447E (mailed Sept. 19, 2008).

50
Therefore, the Company believes Ms. Podeins arguments do not provide a basis for a

departure from the use of the GPVM Adder.

d. The Companys proposed approach to the GPVM Adder in Phase II


provides transparency and should be approved.

In its rebuttal case, the Company proposed to remove the GPVM Adder from the

high and low gas price sensitivities and keep the GPVM Adder only in the base case.160

With respect to the base case, however, the Company will clearly identify the impact of

the GPVM adder on the PVRR for the resource portfolios presented in the Companys

120-Day Report. 161 This will give the Commission three key looks in the 120-Day

Report and allow for evaluation of how portfolios fare: (1) in a high gas price future with

no GPVM Adder; (2) in a low gas price future with no GPVM Adder; and (3) under the

base case with the GPVM Adder, but with the impact of the GPVM Adder clearly

demarcated for the Commission to consider. The Company believes that this approach

allows for the continued use of the GPVM Adder while providing significant

transparency with regard to its impacts on each bid portfolio. The Commission should

approve the Companys proposed approach with respect to the well-established GPVM

Adder.

iii. Carbon pricing

The extensive discussion of carbon pricing values and the future of carbon

regulation in this proceeding coalesce into two inquiries: (1) whether the Companys

carbon proxy pricing proposal is reasonable or whether a carbon regulatory price should

be imputed into the base case; and (2) whether the federal social cost of carbon

160
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 45:15-19 (filed Jan. 30, 2017).
161
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 45:15-17 (filed Jan. 30, 2017).

51
(SCC), a carbon externality estimate, should be modeled as a sensitivity case. The

Company believes its proposed low and high carbon proxy price sensitivities will provide

the Commission a broad view of the performance of bid portfolios over two different

carbon regulatory futures in the Phase II bid evaluation process; it is appropriate to

include a $0/ton carbon price in the base case to allow the Commission to fully gauge

the impacts of the carbon price on each bid portfolio; and running a sensitivity premised

on a damage-based externality estimate like the SCC is unnecessary, inconsistent with

past ERPs, and likely inconsistent with current Colorado statues. These positions are

discussed further below, following a brief discussion of the Commissions authority in

this arena as requested by the Commission at hearing. 162

Before delving into these issues, however, it is important to keep the bigger

picture in mind from a climate and air quality standpoint. The Company has consistently

demonstrated a commitment to emission reductions as a key component of meeting

customers needs. To that point, Public Service has reduced carbon emissions by 25%

since 2005 and will reach 35% from this 2005 baseline by 2020. 163 In addition, by 2020

the Company will reduce sulfur dioxide emissions by 83% and nitrous oxide emissions

by 76% from 2005 levels. 164 Public Service also remains well ahead of international

carbon emission reduction targets, as detailed in the rebuttal testimony of Company

162
Hr. Tr. IV, at 155:3-17 (comments of Commissioner Koncilja seeking some focused legal analysis on
what authority we have with regard to consideration of carbon pricing in the ERP process.)
163
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 70:12-17 (filed Jan. 30,
2017).
164
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 70:17-18 (filed Jan. 30,
2017).

52
165
witness Ms. Jackson. With this history of emission reductions in mind, the

Companys position on carbon pricing issues in this proceeding follows below.

a. This Commissions statutory authority with regard to carbon pricing.

Section 40-2-123(1)(b), C.R.S., provides the statutory anchor for the

Commissions authority to consider costs associated with future environmental

regulation. The statute provides in pertinent part that [t]he commission may give

consideration to the likelihood of new environmental regulation and the risk of higher

future costs associated with the emission of greenhouse gases such as carbon dioxide

when it considers utility proposals to acquire resources. 166 Rule 3610(c) implements

this statutory provision and clarifies that the Commission may exercise this authority in

evaluating utility proposals to acquire additional resources during the resource

acquisition period. 167

The evidence in this proceeding has created two distinct categories of costs

related to carbon emission, and the parties appear to agree on these two categories. 168

The first category is regulatory costs, which are compliance costs that could be directly

incurred by Public Service customers. 169 The second category is costs related to

externalities, which involve cost estimates related to potential climate damages

165
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 71:11 72:7 (filed Jan. 30,
2017).
166
40-2-123(1)(b), C.R.S.
167
4 C.C.R. 723-3-3610(c) (The Commission may give consideration of the likelihood of new
environmental regulations and the risk of higher future costs associated with the emission of greenhouse
gases such as carbon dioxide when it considers utility proposals to acquire additional resources during
the resource acquisition period.)
168
See, e.g., Hr. Tr. IV, at 84:24 85:8 (Feb. 6, 2017) (hearing testimony of WRA witness Ms.
Tellinghuisen distinguishing between these two types of costs).
169
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 78:15-17 (filed Jan. 30,
2017); Answer Testimony of Stacy Tellinghuisen (Hr. Ex. 24), at 15:9-15 (filed Dec. 9, 2016).

53
globally. 170 The first category of costs falls directly within the scope of the statute.

These are regulatory compliance costs borne by Public Service customers due to

federal or state environmental regulation. As an example in the carbon regulation

context, these regulatory costs could flow from federal environmental rules such as the

CPP, or from state-level carbon trading programs such as those that exist in California,

Washington, and the nine eastern states that comprise the Regional Greenhouse Gas

Initiative (RGGI). 171 These costs are directly tied to regulations and therefore fit within

the statute. The CPP is stayed and not enforceable, and even if not stayed would not

impose regulatory compliance costs until 2022. 172 There are no other enforceable

federal carbon regulations requiring a price on carbon emissions, and Colorado does

not have a state-level equivalent to the carbon trading programs that exist in California,

Washington, and the RGGI states. Nevertheless, because the statute allows the

Commission to consider the likelihood of new environmental regulation and the costs

that flow from these regulations, the Companys proposed high and low carbon proxy

prices are meant to show potential regulatory costs associated with possible future

environmental regulation of carbon dioxide emissions over the Planning Period. 173

170
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 79:18-20 (filed Jan. 30,
2017); Cross-Answer Testimony of Stacy Tellinghuisen (Hr. Ex. 25), at 4:4-9 (filed Jan. 17, 2017)
(Negative externalities are damages caused by a firms activities for which it does not pay. The classic
example of a negative externality, used in nearly every introductory economic text, is pollution. The costs
associated with pollution, in the form of health impacts, environmental degradation, and climate change,
are not borne by the entity emitting the pollution, but rather by the broader society.)
171
Hr. Tr. IV, at 85:12 87:8 (Feb. 6, 2017) (hearing testimony of WRA witness Ms. Tellinghuisen). The
nine states involved in the voluntary RGGI are Connecticut, Delaware, Maine, Maryland, Massachusetts,
New Hampshire, New York, Rhode Island and Vermont.
172
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 74:12-14 (filed Jan. 30, 2017)
(We apply the carbon price beginning in 2022 to reflect the proposed compliance start of the CPP, and
thus, the year when our customers would begin to incur regulatory compliance costs.)
173
40-2-123(1)(b), C.R.S. (emphasis added).

54
The second category of costs, i.e., the estimation of externalized damages from

carbon emissions, does not fit neatly within the statutory parameters established by

40-2-123(1)(b), C.R.S., if at all. The most common metric used at the federal level to

measure the costs related to externalities from carbon emissions is the federal SCC,

which provides an estimate of monetary damages to society globally, from the year of

emission through the year 2300, caused by an additional ton of CO2 emitted to the

earths atmosphere in a specified year. 174 The SCC is not a regulation, however, and

is instead used to conduct cost-benefit analyses of proposed federal regulations. 175 In

other words, the federal regulations themselves derive from standalone statutory

authority possessed by a particular agency, not from the federal SCC. The SCC is

therefore only used as an analytical tool to conduct required cost-benefit analyses of

regulations as they work their way through the rulemaking process. Moreover, the SCC

does not represent costs in the specific sense of costs imposed on Public Service

customers due to compliance with new environmental regulation, but rather costs in

the more general sense of estimated damages that may be incurred by Public Service

customers (and equally by all other citizens, globally) due to climate change.

Because the SCC is not a new environmental regulation that is likely or

possible, it is not within the scope of the statute. Any argument for use of the federal

SCC as a sensitivity or otherwise in this proceeding must therefore hinge on the risk of

174
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 78:2-4 (filed Jan. 30, 2017).
175
Hr. Tr. IV, at 84:15-18 (Feb. 6, 2017) (testimony of WRA witness Ms. Tellinghuisen regarding the use
of the SCC); Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 78:10-12 (filed Jan.
30, 2017) (The SCC was designed for a sole purpose: the cost-benefit analysis of proposed federal
regulations as required under Executive Order 12866.) For example, both COSEIA witness Mr. Freeman
and WRA witness Ms. Tellinghuisen cite a Seventh Circuit case in their testimony regarding the federal
SCC, Zero Zone, Inc. v. U.S. Dept. of Energy, 832 F.3d 654 (7th Cir. 2016). While the Seventh Circuit
upheld the use of the federal SCC in this case, the actual regulations issued by DOE are based on
separate statutory authority.

55
higher future costs associated with the emission of greenhouse gases such as carbon

dioxide language in the statute. This reading, however, requires one to read out the

language likelihood of new environmental regulation that is attached to the phrase the

risk of higher future costs by a conjunctive and. This reading is contrary to well-

established principles of statutory construction.

The plain meaning of a statute, if its meaning is clear and absurdity does not result,

is to be given effect and [t]he entire statute is to be effective. 176 Different statutory

provisions should be read in a manner that avoids ambiguity or contradiction, and more

specific statutory provisions control over more general provisions. 177 Only if a statute is

ambiguous does one rely on other factors such as the circumstances surrounding the

enactment of the statute or the legislative history, among other things. 178 And most

relevant here, the Colorado Supreme Court has expressed that [w]e do not add words

to the statute or subtract words from it.179

A reading of the statute that focuses solely on the risk of higher future costs

associated with the emission of greenhouse gases such as carbon dioxide subtracts

words from the statute, specifically the likelihood of new environmental regulation

phrase that precedes this language and confines its application. The Commission

should not adopt such a constrained reading of 40-2-123(1)(b), C.R.S. and should

instead only consider regulatory costs in this ERP because these costs tie back to the

the likelihood of new environmental regulation and the risk of higher future costs
176
People v. Nara, 964 P.2d 578, 580 (Colo. App. 1998); 2-4-201(1)(b), C.R.S.
177
See, e.g., Colo. Min. Ass'n v. Bd. of Cnty. Comm'rs of Summit Cnty., 199 P.3d 718, 733 (Colo. 2009);
In re Marriage of Ikeler, 161 P.3d 663, 667 (Colo. 2007); Anderson v. Longmont Toyota, Inc., 102 P.3d
323 (Colo. 2004); Leaffer v. Zarlengo, 44 P.3d 1072, 1079 (Colo. 2002); City and Cnty. of Denver v. Bd.
of Assessment Appeals of State of Colo., 947 P.2d 1373, 1378 (Colo. 1997) (en banc).
178
2-4-203(1)(a)-(g), C.R.S.
179
Turbyne v. People151 P.3d 563, 567 (Colo. 2007).

56
associated with the emission of greenhouse gases such as carbon dioxide . 180

b. Public Services carbon proxy prices are reasonable and a carbon


price should not be included in the base case.

The Companys proposed approach to modeling carbon sensitivities in this

proceeding builds on the approach approved by the Commission in the 2011 ERP. In

the 2011 ERP, the Commission ordered the Company to present in its 120-day report

two distinct cases for the bid evaluation modeling results, resulting in a $0/ton cost for

carbon in the base case and a case with a value of $20/ton beginning in 2017. 181 The

Commission in the 2011 ERP also looked forward to this ERP through its Phase II

decision, requiring the Company to address, among other things, running a a sensitivity

case assuming high carbon costs for all portfolios in future ERP modeling. 182 The

Company has done exactly that, developing the high carbon proxy price reflected in

Table 2.11-4 along with the low carbon proxy price to use in sensitivities to supplement

the base case, which as in the 2011 ERP will continue to have a $0/ton carbon price. 183

One key difference between the 2011 ERP and this ERP from a carbon proxy pricing

standpoint is that carbon pricing is slated to begin in 2022 as opposed to 2017. 184 The

rationale for this shift is explained in ERP Volume 2: We will begin this value in 2022,

rather than 2017, however, as there is no prospect of a price on carbon in Colorado in

180
40-2-123(1)(b), C.R.S.
181
Decision No. C13-0094 (Hr. Ex. 39), at 186-187, Proceeding No. 11A-869E (mailed Jan. 24, 2013).
182
Decision No. C13-1566 (Hr. Ex. 41), at 40-41, Proceeding No. 11A-869E (mailed Dec. 20, 2013);
183
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-265 (filed Jan. 30, 2017).
184
Commissioner Koncilja questioned the basis for beginning carbon pricing in 2022 at hearing. Hr. Tr. IV,
at 155:8-12 (Feb. 6, 2017) (For example, Public service, I don't understand why you want to begin the
carbon pricing in 2022, which seems to me a little arbitrary. So those are the issues that I would like to
see robustly briefed in terms of what authority do we have.)

57
2017, and the earliest we expect carbon pricing to begin is 2022, the current start year

of the CPP. 185

Both WRA and COSEIA argue that some level of carbon costs should be

included in the base case in the Phase II modeling process. The Commission ordered

the inclusion of carbon costs in the base case in the 2007 ERP, specifically the use of

carbon costs starting at $20/ton with a 7% escalation per year in base case modeling. 186

The Commission based this decision on new state legislation, which implemented 40-

2-123(1)(b), C.R.S., and its observation that political acceptance of carbon legislation

appears to be gaining momentum. 187 In the 2011 ERP, the Commission took a

different course based on its observations of the public policy state of play surrounding

future carbon regulation, deciding against the inclusion of carbon costs in the base case

because there is not sufficient indication at this time that Congress will enact legislation

that would attach a price to carbon emissions, and the impact on carbon pricing from

the adoption of a federal clean energy standard is unclear. 188

With the stay of the CPP by the U.S. Supreme Court and the very likely demise

of the rule in its current form, and in the absence of any other state or federal level

carbon regulation at this time, the Company believes the circumstances surrounding

this ERP are more akin to the 2011 ERP than the 2007 ERP. 189 This absence of

imminent or perhaps even reasonably foreseeable carbon regulation counsels in favor

185
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-262 (filed Jan. 30, 2017).
186
Decision No. C08-0929 (Hr. Ex. 37), at 269-270, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
187
Decision No. C08-0929 (Hr. Ex. 37), at 269, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
188
Decision No. C13-0094 (Hr. Ex. 39), at 182, Proceeding No. 11A-869E (mailed Jan. 24, 2013).
189
Hr. Tr. IV, at 77:6 80:15 (Feb. 6, 2017) (hearing testimony of WRA witness Ms. Tellinghuisen).

58
of adopting the Companys proposed approach of using low and high carbon proxy price

sensitivities with a $0/ton carbon proxy price in the base case.

The use of a $0/ton carbon price in the base case also provides benefits to the

Commission from a bid evaluation perspective. For example, Attachment AKJ-11 to the

rebuttal testimony of Company witness Ms. Jackson included an excerpt from Mr. Hills

testimony in the 2011 ERP explaining the important role played by the $0/ton carbon

case. Mr. Hill testified that the absence of portfolio cost information (annual costs and

planning period PVRRs) for a $0/ton CO2 case will mask the additional costs that

customers may be asked to pay for clean technologies and would severely limit the

Company and Commissions ability to fully understand the magnitude by which CO2

price assumptions influence these portfolio costs. 190 Hearing Exhibit 72 (excerpted

below), an updated version of Figure 1.5-2 prepared at the request of Commissioner

Moser and introduced at hearing, 191 illustrates the issue Mr. Hill refers to:

190
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), Attachment AKJ-11, at 2 (filed
Jan. 30, 2017) (testimony of Company witness Mr. Hill in Proceeding No. 11A-869E).
191
Updated Figure 1.5-2 (Hr. Ex. 72); Hr. Tr. IV, at 14:2-6 (Feb. 6, 2017).

59
This figure shows the impact of the low carbon proxy price (third column) and high

carbon proxy price (fourth column) on a PVRR basis for each of the alternative plans

modeled pursuant to Rule 3604(k). Without the $0/ton base case, there would be no

point of comparison for the Commission as to how the use of carbon proxy pricing

affects the PVRR of a particular portfolio. Further, as explained by Company witness

Ms. Jackson at hearing, the carbon proxy prices have the potential to reorder bid

portfolios in terms of what is lowest cost; therefore, one portfolio may be lowest cost

without a carbon price imputation, but that may no longer be the case once a carbon

proxy price is considered in the modeling. 192 To be sure, the Commission has authority

to select a higher cost bid portfolio, but without a $0/ton scenario the Commission would

192
Hr. Tr. II, at 27:12-24 (To put a really clear point on it, when we provide the bid curves and the
portfolios to the Commission on evaluation, what you may or may not see is when those bids come in,
with or without the carbon pricing that with then run through sensitivities, it could change the order of
which of those builds is the lowest cost. And by doing that, you may be thereby selecting a higher cost
resource and as I mentioned yesterday, monetizing a cost of carbon into the cost of electricity. That is
really the risk that you are facing and that could potentially increase the cost to customers through the
selection of that resource.)

60
have to do so without knowing how the bid portfolio performs in a $0/ton carbon

environment.

For all of these reasons, the $0/ton carbon price in the base case serves an

important role from a practical perspective. The Commission should approve the

Companys proposed approach to run low and high carbon proxy price sensitivities

while including a $0/ton carbon price in the base case. This approach gives the

Commission a broad view of potential carbon regulatory futures and allows it to select a

bid portfolio in the Phase II process based on a complete scope of information after

evaluating each bid portfolio in three distinctly different carbon futures.

c. A third carbon sensitivity based on the SCC is extraneous and


inappropriate.

WRA advocates for an additional sensitivity based on the federal SCC, and

COSEIA through the testimony of its witness Mr. Freeman appears to join in the same.

The Company opposes this recommendation and believes it is extraneous and

unnecessary to add yet a third carbon price sensitivity to the Phase II bid evaluation

process. Moreover, an SCC sensitivity is not reflective of what would actually appear

on a customers bill. 193 And finally, as discussed in detail above, requiring such a

sensitivity based on the federal SCC likely ventures beyond the authority conferred on

this Commission through 40-2-123(1)(b), C.R.S., because the federal SCC bears no

relationship to any existing or future regulation. 194 It is merely an analytical tool

193
Hr. Tr. I, at 127:23 128:5 (Feb. 1, 2017) (Hearing testimony of Company witness Ms. Jackson: The
company's position and opinion, on the social cost of carbon, it is not a valid representation of costs that
our customers are going to incur on their bill; and, so, therefore -- and also for the purposes of the
creation of the social cost of carbon, it is not the appropriate metric to include in the cost evaluation,
because it will not flow through to our customers' bill.)
194
The federal SCC, under the Trump Administration, and as conceded by WRA witness Ms.
Tellinghuisen, could be modified or eliminated through agency action. This creates another reason not to

61
developed to evaluate costs and benefits of federal regulations, not utility resource

planning decisions.

WRA looks to Minnesota for support of its position that a federal SCC sensitivity

is appropriate in this proceeding. 195 The notion WRA puts forward is that the

Companys affiliate, Northern States Power Company (NSP), employs the federal

SCC in its resource planning (as well as a carbon price in the base case), and therefore

Public Service should do the same. But the Commission should view this argument

with caution. NSP and Public Service are separate utilities with separate service

territories in different jurisdictions. Xcel Energy, Inc. has operating companies that

operate in differing regulatory regimes across states even within a single company. For

example, NSP serves five Upper Midwest states (Minnesota, North Dakota, South

Dakota, Wisconsin, and Michigan), and conducts resource planning for the five-state

system.

These states also have their own state law architecture that dictates the resource

planning activities required within the state. In Minnesota, one statute (Minn. Stat.

216H.06) requires the use of a regulatory proxy cost in resource planning, while a

separate statute (Minn. Stat. 216B.2422) requires the use of externality values in

resource planning. 196 Minnesota state law does not, however, require the use of the

use the SCC for resource planning: significant uncertainty about what the actual value would be. Hr. Tr.
IV, at 89:3-8 (Feb. 6, 2017) (hearing testimony of WRA witness Ms. Tellinghuisen: I think there may be
decisions -- or political decisions to erase or eliminate the entire social cost of carbon.)
195
See, e.g., Hr. Tr. I, at 123:8 125:3 (Feb. 1, 2017) (exchange between WRA counsel and Company
witness Ms. Jackson).
196
Minn. Stat. 216H.06 (Hr. Ex. 53) ([T]he Public Utilities Commission shall establish an estimate of the
likely range of costs of future carbon dioxide regulation on electricity generation. The estimate, which may
be made in a commission order, must be used in all electricity generation resource acquisition
proceedings.); Minn Stat. 216B.2422 subd. 3 (Hr. Ex. 53) (The commission shall, to the extent
practicable, quantify and establish a range of environmental costs associated with each method of

62
federal SCC as its CO2 externality value under Minn. Stat. 216B.2422. And while a

Minnesota Public Utilities Commission proceeding is ongoing to update this externality

value, there has been no decision to adopt the federal SCC as this externality value.

The CO2 externality values currently in use by the Minnesota Public Utilities

Commission, therefore, range from $0.44 (Low) to $4.58 (High) per ton of CO2

emitted. 197

North Dakota statutes, on the other hand, expressly forbid consideration of both

regulatory proxy costs and externality values. 198 Colorado, through 40-2-123(1)(b),

C.R.S., falls between Minnesota and North Dakota, allowing for consideration of

regulatory costs but likely not externality values. In each jurisdiction, the Xcel Energy,

Inc. affiliate operates under the statutory framework and rules and regulations

applicable to that jurisdiction. Accordingly, it is inappropriate to require a sensitivity

case based on the federal SCC in Colorado and for Public Services ERP on the basis

that NSP may in the future be required to present such a sensitivity in Minnesota. 199

electricity generation. A utility shall use the values established by the commission in conjunction with
other external factors, including socioeconomic costs, when evaluating and selecting resource options in
all proceedings before the commission, including resource plan and certificate of need proceedings.)
197
State of Minnesota Public Utilities Commission. Notice of Updated Environmental Externality Values.
Issued: June 16, 2016. In the Matter of the Investigation into Environmental and Socioeconomic Costs
Under Minn. Stat. 216B.2422, Subd. 3. PUC Docket Number/s: E-999/CI-93-583 and E-999/CI-00-1636.
198
N.D. Cent. Code 49-02-23 (Hr. Ex. 55) (Consideration of environmental externality values prohibited.
The commission may not use, require the use of, or allow electric utilities to use environmental externality
values in the planning, selection, or acquisition of electric resources or the setting of rates for providing
electric service. Environmental externality values are numerical costs or quantified values that are
assigned to represent either: 1. Environmental costs that are not internalized in the cost of production or
the market price of electricity from a particular electric resource; or 2. The alleged costs of complying with
future environmental laws or regulations that have not yet been enacted.)
199
Even if the Commission were inclined to consider adopting a social cost of carbon value as a
sensitivity, there is insufficient evidence in the record to support such a finding, or what that value should
be. As noted above, Minnesota has not adopted the federal SCC as its CO2 externality value, and it is
inappropriate to adopt such value used purely for the purpose of evaluating federal regulations. In
Minnesota, the Minnesota PUC provided notice and opened a proceeding to present and rebut evidence
concerning an appropriate SCC value, something that has not occurred in this proceeding. Decisions of
the Commission must be "in accordance with the evidence" before it. 40-6-115(3), C.R.S. And

63
For the same reason, it is inappropriate to reject the use of such a sensitivity because it

is prohibited in North Dakota. This logic ignores the significant differences in statutory

requirements as between all of these states.

The decision of whether to require a sensitivity case based on the federal SCC

should be based solely on Colorado law and the Commissions ERP Rules. As

discussed, a review of applicable law and the ERP Rules shows that requiring an SCC

sensitivity likely goes beyond the scope of 40-2-123(1)(b), C.R.S. Further, given that

the Company has already proposed to run two different sensitivities based on low and

high regulatory costs, which do fall squarely within the scope of the statute, an SCC

sensitivity is extraneous and unnecessary. It therefore should be rejected by this

Commission.

iv. Natural gas price forecast

The Company proposes to use a four-source blend natural gas price forecast in

the Phase II bid evaluation process. Under this approach, Henry Hub natural gas

prices are developed using a blend of the latest market information (New York

Mercantile Exchange (NYMEX) futures prices) and long-term fundamentally-based

forecasts from Wood Mackenzie, Cambridge Energy Research Associates (CERA) and

Petroleum Industry Research Associates (PIRA). 200 Company witness Mr. Scholl

explained in his rebuttal testimony that the four sources are blended at differing ratios

during different time periods to produce the forecast, and basis differentials are

applied to the Henry Hub forecast to produce a natural gas price forecast representative

Commission decisions which are not supported by substantial evidence must be set aside. See Morey v.
Pub. Util. Commn, Colo., 629 P.2d 1061 (Colo. 1981); Sangre de Cristo Elec. Ass'n. v. Pub. Util. Commn,
524 P.2d 309 (Colo. 1974).
200
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-181 (filed Jan. 30, 2017).

64
of costs at a Colorado Interstate Gas trading location. 201 The Commission approved

this methodology, using the same four sources of natural gas price forecasts, in the

Companys 2011 ERP proceeding. 202 In addition, the Commission approved the use of

high and low gas price sensitivities for the 2011 ERP; the Company seeks approval of

the use of high and low gas price sensitivities again through this ERP proceeding. 203

Only OCC raised issues regarding the use of the four-source blend, and OCC

witness Mr. Neil argued it was inconsistent with a prior Commission directive in a

proceeding involving the Peak View Wind Project proposed by Black Hills/Colorado

Electric Utility Company, LP (Black Hills). 204 In that proceeding, the Commission

ordered Black Hills to use assumptions for natural gas costs that start at levels

commensurate with prevailing New York Mercantile Exchange [NYMEX] futures .205

Mr. Neil believes this decision sets a universal standard for natural gas price forecasts

applicable in any future resource acquisition proceeding before the Commission.

This argument fails for three reasons. First, it fails to account for the fact that the

Black Hills proceeding where the Commission issued this order was highly unusual.

After denying Black Hills request for approval of a wind resource following a Phase II

201
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 45:1-4 (filed Jan. 30, 2017).
202
Decision No. C13-0094 (Hr. Ex. 39), at 190, 193, Proceeding No. 11A-869E (mailed Jan. 24, 2013)
(Public Service proposes to use a four source blend of the New York Mercantile Exchange futures
prices and long-term forecasts from Wood Mackenzie, Cambridge Energy Research Associates, and
Petroleum Industry Research Associates, in a manner similar to the method that was used in the 2007
ERP. This forecast is a primary component of the modeling of the various resource proposals over the
40-year NPVRR evaluation. The Company also proposes gas price sensitivities based on the standard
deviation of historical data . We find Public Services proposed methodology, including the four-source
blend and proposed standard deviation-based gas price sensitivities appropriate.)
203
Decision No. C13-0094 (Hr. Ex. 39), at 193, Proceeding No. 11A-869E (mailed Jan. 24, 2013).
204
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 33:18-21 (filed Jan. 30, 2017) (Recent
Commission actions establish that a companys natural gas price forecast needs to be consistent with the
current gas prices and accepted the NYMEX futures prices as appropriate when a company is making a
determination whether a proposed resource is cost effective.)
205
Decision No. C15-0373, at 60, Proceeding No. 13A-0445E (mailed Apr. 24, 2015).

65
solicitation, the Commission gave the utility an opportunity to come back and re-file for

approval of the same resource in a new proceeding, using updated natural gas price

assumptions. 206 Mr. Neil conceded that this decision and Commission directive grew

out of special circumstances at hearing, and OCC has provided no evidence that the

Commission sought to establish a new standard through this decision that all natural

gas price forecasts may rely only on NYMEX data. 207 In fact, the decision says nothing

of the sort.

Even if this were a new standard applicable to the instant proceeding, Mr. Neils

argument overlooks the fact that the Companys four-source blend natural gas price

forecast starts with NYMEX monthly futures pricing. Company witness Mr. Scholl

pointed out in his rebuttal testimony that [t]he first 29 months of the four-source blend

forecast provided in Table 2.7-2 of Attachment AKJ-2 are the NYMEX monthly futures

prices. 208 Further, Mr. Neils own answer testimony, in Figure CN-1, shows the equality

between the four-source blend and NYMEX natural gas price futures in the opening

period, and Mr. Neil also conceded this point at hearing. 209

Third, Mr. Neils argument should be rejected for practical reasons. The

fundamental proposition that Mr. Neil relies on in support of a pure NYMEX natural gas

206
Decision No. C15-0373, at 59, Proceeding No. 13A-0445E (mailed Apr. 24, 2015) (Notwithstanding
our determination that none of the bids featured in Black Hillss 120-Day Report can be acquired at a
reasonable cost and rate impact, we modify the Phase II Decision by removing the prohibition on the
Company from pursuing any of the proposed projects. By this Decision, we have described our standards
for determining whether a proposed eligible energy resource can be acquired at a reasonable cost and
rate impact. We therefore will allow Black Hills, at its discretion, to renegotiate the bids for eligible energy
resources up to 60 MW and to submit the associated contract or contracts for our approval according to
those standards.)
207
Hr. Tr. IV, at 36:15 38:3 (Feb. 6, 2017).
208
Corrected Revised Rebuttal Testimony of Kent L. Scholl, at 46:17-18 (Hr. Ex. 8) (filed Jan. 30, 2017)
(emphasis in original).
209
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 32:1-4 (filed Jan. 30, 2017); Hr. Tr. IV, at
36:9-14 (Feb. 6, 2017).

66
price forecast is that there is sufficient trading volume information in the first few years

to assemble a forecast based on this data. Company witness Mr. Scholls rebuttal

testimony, however, established that [l]ittle trading volume typically occurs beyond the

first 12 months, as shown in Figure KLS-2 (reproduced below) 210:

Accordingly, there is insufficient data upon which to build a reliable natural gas price

forecast. Mr. Neils position also ignores the similarity between his NYMEX forecast

and the low gas price forecast proposed for use as a sensitivity proposed by the

Company, which is clearly shown in Figure CN-1. 211 In essence, his NYMEX forecast

is duplicative of the low gas price forecast. The Commission will therefore receive data

regarding the cost-effectiveness of bid portfolios under a similar gas price forecast even

if Mr. Neils NYMEX forecast is rejected.

For all of these reasons, the Commission should reject the argument of OCC

witness Mr. Neil and approve the Companys proposed four-source blend natural gas

210
Corrected Revised Rebuttal Testimony of Kent L. Scholl, at 48:1-9 (Hr. Ex. 8) (filed Jan. 30, 2017).
211
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 32:1-4 (filed Jan. 30, 2017).

67
price forecast and high and low gas price sensitivities, consistent with its approval in the

2011 ERP proceeding.

v. Strategist modeling capabilities

The capabilities of the Strategist model were made an issue in this proceeding as

an extension of CIEA witness Mr. Monsens proposal that the Company procure

generation resources now to potentially replace 25% of the Companys coal-fired

generation, which Mr. Monsen unilaterally deems at-risk. 212 Mr. Monsen asserts that

Public Service should use Strategist to optimize portfolio selection while allowing the

model to select resources for early retirement if doing so would decrease the present

value of revenue requirement or develop additional scenarios that exclude selected

coal-fired resources to test whether their replacement with an optimized portfolio

reduces costs.213

There are two salient issues with regard to Mr. Monsens proposal. First, while

Strategist may be capable of conducting such analyses, the extent of these capabilities

is unknown and the functionality of such optimization is fairly crude, in the words of

Company witness Mr. Hill at hearing. 214 However, the second issue is more important,

as a focus on the capabilities of the model risks missing the forest for the trees. Mr.

Monsens recommendation suffers from two fatal deficiencies in that it raises

212
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 57:7-10 (filed Jan. 30, 2017)
(The Commission should direct PSCo to procure resources to replace a portion of PSCos potentially at-
risk coal-fired generation during its RAP as a hedge against this outcome. I recommend the Commission
consider 25% of this coal-fired generation as at-risk capacity in assessing the potential procurement
target in this proceeding.)
213
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 57:13-18 (filed Jan. 30,
2017).
214
Hr. Tr. II, at 107:15-19 (Feb. 2, 2017) (I do recall that there's a capability within the Strategis[t]
software algorithms that it can examine those types of issues. We've never used it. And I think the reason
we haven't used it is it is fairly crude is my recollection.)

68
constitutional issues and is contrary to the ERP Rules. 215 Accordingly, even if Strategist

is capable of the modeling requested by Mr. Monsen, Commission action based on the

modeling results to force retirement of generation resources absent a utility proposal to

do so fundamentally restructures the ERP process and may result in a regulatory taking.

These significant legal issues must color any analysis of Mr. Monsens modeling

requests and his 25% at-risk coal procurement proposal. While stylized as separate

recommendations, Mr. Monsens modeling recommendation and 25% at-risk coal

procurement proposal are in fact inextricably intertwined with one another. 216

a. The excess capacity procurement proposal is contrary to ERP


Rules.

Company witness Ms. Jackson explains that the Company agrees with Mr.

Monsen that decreasing costs for renewable energy and low natural gas prices,

coupled with increasingly stringent air quality and other environmental regulations, have
217
created a challenging environment for coal-fired generation. These market

dynamics, however, do not support a fundamental restructuring of the ERP Rules,

which is the exact result of Mr. Monsens recommendation. Mr. Monsen himself

implicitly concedes this point. 218 The result of this recommendation is a bottoms up

look at the electric generating system in every ERP, where excess generation resources

215
Hr. Tr. II, at 65:4-8 (Feb. 2, 2017) (testimony of Company witness Ms. Jackson that the proposal that
was made by CIEA in regards to the 25 percent at risk is contrary to the rules of developing the Electric
Resource Plan and the intention for the use of the Electric Resource Plan.)
216
As an aside and noted by Company witness Ms. Jackson at hearing, Mr. Monsen provided no basis at
all for the 25% figure. Hr. Tr. II, at 65:14-17 (Feb. 2, 2017); see Corrected Revised Rebuttal Testimony of
Alice K. Jackson (Hr. Ex. 2), at 38:20-21 (filed Jan. 30, 2017) ([T]his recommendation is not supported by
the arbitrary nature of Mr. Monsens 25% procurement target.)
217
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 38:4-7 (filed Jan. 30, 2017).
218
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 56:16-20 (filed Jan. 30, 2017)
(In past ERPs, it was reasonable to identify resource needs based on scheduled retirements, contract
expirations and load growth while assuming that existing coal-fired generators continue to operate until
their retirement dates. In the current economic and regulatory environment (in addition to coals climate
change impacts), that assumption should be tested and not simply taken as a given.)

69
are procured based on the notion that select units might retire early without any

concrete proposals to do so. This system-wide look and excess resource procurement

undoubtedly benefits CIEA and its members as it results in an increased resource need.

It does not benefit Public Service customers, however, who would bear the burden of

increased costs if the generation resources that might retire ultimately do not and the

Company ends up long on capacity as a result of having procured excess generation

resources through the ERP. 219

As discussed at the outset of this SoP, the ERP Rules make clear that the ERP

identifies incremental resource needs and then fills the incremental resource needs

through the resource acquisition process. Numerous existing ERP Rules run contrary

to Mr. Monsens proposal:

Rule 3601. The purpose of these rules is to establish a process to

determine the need for additional electric resources by electric utilities subject

to the Commissions jurisdiction and to develop cost-effective resource

portfolios to meet such need reliably. 220

Rule 3602(c). Cost-effective resource plan is a combination of new

resources that can be acquired at a reasonable cost and rate impact. 221

Rule 3607. Subpart (a) provides that [t]he utility shall describe its existing

resources, all utility-owned generating facilities for which the utility has

obtained a Certificate of Public Convenience and Necessity (CPCN). 222

219
Hr. Tr. II, at 65:23 66:2 (Feb. 2, 2017) (hearing testimony of Company witness Ms. Jackson that the
Company could end up significantly long as a result of the outcome of this resource acquisition.)
220
4 C.C.R. 723-3-3601 (emphasis added).
221
4 C.C.R. 723-3-3602(c).
222
4 C.C.R. 723-3-3607(a).

70
Subpart (a)(V) further requires the utility to include in its ERP the [e]stimated

remaining useful lives of existing generation facilities without significant new

investment or maintenance expense.223

Rule 3610(a). Comparing the energy and demand forecasts against existing

resources, the utility shall assess the need to acquire additional resources

during the resource acquisition period. 224

Rule 3611(a). It is the Commissions policy that a competitive acquisition

process will normally be used to acquire new utility resources.225

These ERP Rules provide the fundamental basis for an ERP, and Mr. Monsens

proposal would upend these rules through a single Phase I decision if his

recommendation were adopted by this Commission. 226 Moreover, in addition to Mr.

Monsens proposal being contrary to the ERP Rules in Colorado, it is telling that CIEA

and Mr. Monsen were unable to identify a single jurisdiction where his excess capacity

procurement approach is used by utilities and regulators. The Company conducted

discovery to see if Mr. Monsen could point to other public utility commissions or public

service commissions that employ an approach similar to his proposal. Discovery

request PSCo3-3 to CIEA, attached to Company witness Ms. Jacksons rebuttal

testimony as Attachment AKJ-5, sought any known examples of competitive resource

solicitations in vertically integrated markets where the public utilities commission, public

service commission, or other regulatory body with competent jurisdiction, deemed a


223
4 C.C.R. 723-3-3607(a)(V).
224
4 C.C.R. 723-3-3610(a) (emphasis added).
225
4 C.C.R. 723-3-3611(a) (emphasis added).
226
See, Hr. Tr. II, at 65:4-8 (Feb. 2, 2017) (testimony of Company witness Ms. Jackson regarding specific
ERP Rules, noting that [t]his language suggests to me that the proposal that was made by CIEA in
regards to the 25 percent at risk is contrary to the rules of developing the Electric Resource Plan and the
intention for the use of the Electric Resource Plan.)

71
certain portion of the coal-fired generation fleet at-risk of retirement or early closure

(where there was no pending proposal by the regulated utility to retire the coal-fired

generation unit(s) in question) and sought proposals in the competitive solicitation

process to fill the generation shortfall if the at-risk generation did in fact retire in the

future. CIEA objected, and over this objection responded that Mr. Monsen has not

performed this research. All of this leads to the conclusion that the 25% at-risk coal

procurement proposal is contrary to the ERP Rules and without known precedent in any

other vertically-integrated jurisdiction in the country.

b. Forced retirements of generation resources constitute a regulatory


taking.

Mr. Monsens proposal also raises legal issues that extend beyond compliance

with the ERP Rules. At hearing, Company witness Ms. Jackson testified that forced

retirement of Company-owned generation resources, i.e., in the absence of a voluntary

Company retirement proposal or action by the General Assembly mandating the

retirement, may result in a regulatory taking. 227 Under Colorado law, a public utility is

required to obtain a Certificate of Public Convenience and Necessity (CPCN) from the

Commission before beginning construction on a new generation facility. 228 A CPCN

therefore represents a property right recognized by the Commission. 229 In Proceeding

No. 06D-026G, Kinder Morgan, Inc. (KMI) petitioned the Commission for a declaratory

order that KMIs CPCN franchise rights to serve territory in two counties remained in

effect even with a finding that the counties did not have the right to enter into franchise

227
Hr. Tr. II, at 66:6-9 (Feb. 2, 2017).
228
40-5-101(1)(a), C.R.S.
229
See Decision No. C06-1118, Proceeding No. 06D-026G (mailed Sept. 26, 2006).

72
agreements. 230 KMI, along with Public Service as an intervener, argued that CPCNs

are property rights that, under the doctrine of regulated monopolies, may only be taken

if a public utility is, unwilling or unable to provide adequate service. 231 Agreeing with

KMI and Public Service about the nature of a CPCN, the Commission found that, [i]t is

also well established that CPCNs are property rights that may not be revoked without

due process of law. 232 Because a CPCN is a property right, the Commission further

found, [i]n order to revoke a CPCN, it must be proven in an evidentiary hearing that the

utilitys service is substantially inadequate. 233 Therefore, because there were not even

allegations that KMI had refused or been unable to serve any customers in the counties,

its CPCNs could not be revoked simply because the counties were not able to enter into

franchise agreements with KMI. 234

Moreover, the Fifth Amendment of the United States Constitution provides that

[n]o person shall be . . . deprived of life, liberty, or property, without due process of law;

nor shall private property be taken for public use, without just compensation.235 In the

landmark Fifth Amendment case, Penn Central Transportation Company v. City of New

York, the United States Supreme Court established a three-part test to determine if a

taking has occurred: (1) the economic impact on the property; (2) the interference with

investment-backed expectations; and (3) the character of the government action. 236 In

Penn Central, the plaintiff owned Grand Central Station and wished to construct a high-

230
Decision No. C06-1118, at 1, Proceeding No. 06D-026G (mailed Sept. 26, 2006).
231
Decision No. C06-1118, at 4, Proceeding No. 06D-026G (mailed Sept. 26, 2006).
232
Decision No. C06-1118, at 13, Proceeding No. 06D-026G (mailed Sept. 26, 2006) (citing City of
Greeley v. Poudre Valley R. Elec., 744 P.2d 39 (Colo. 1987)).
233
Decision No. C06-1118, at 13, Proceeding No. 06D-026G (mailed Sept. 26, 2006) (citing Town of
Fountain v. Pub. Util. Commn, 447 P.2d 257 (Colo. 1968)).
234
Decision No. C06-1118, at 13-15, Proceeding No. 06D-026G (mailed Sept. 26, 2006).
235
U.S. CONST. amend. V.
236
Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (U.S. 1978).

73
rise above the station, but was forbidden from doing so by New York City regulations

regarding landmarks. 237 While the owners of Grand Central Station were allowed to

build above the station, any additions would need to be of similar aesthetics and limited

to fifty stories, but the unused stories could be transferred to adjacent properties. 238 To

clarify, in Penn Central, the character of the government action referred to whether

there was a physical taking or occupation of the land or even airspace. 239 While this

definition of the character of a taking was physical, the Supreme Court later held that

regulations that destroy the economic value of a property is equivalent to a physical

taking of the property. 240 Because the property was still capable of earning money in its

present form, the development rights for unused building stories were transferrable, and

the regulations were reasonably related to preserving landmarks, there was no taking.

As applied here, Public Services CPCNs for its generation facilities are property

rights that cannot be revoked without due process of law, requiring a finding that Public

Service has been unwilling or unable to serve its customers using those facilities. 241

When Public Service submits portfolios to the Commission in the ERP, the Commission

may choose to adopt any resource portfolio it prefers after receiving input from the utility

through the Phase II process, specifically the 120-Day Report. If Public Service is

237
Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (U.S. 1978).
238
Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (U.S. 1978).
239
Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124-128 (U.S. 1978) ((citing United States
v. Causby, 328 U.S. 256 (1946)).
240
Lingle v. Chevron U.S.A., Inc. 544 U.S. 528, 53738 (U.S. 2005) (citing Lucas v. S.C. Coastal Council,
505 U.S. 1003 (1992)).
241
In City of Fort Morgan v. Colo. Pub. Util. Comm'n, the Colorado Supreme Court upheld the
Commissions granting of a CPCN to a third party gas utility provider within the bounds of a municipal
utility when the municipal utility refused to provide firm gas service to two customers. City of Fort Morgan
v. Colo. Pub. Util. Comm'n, 159 P.3d 87 (Colo. 2007). Thus, the PUC may consider and issue a CPCN
to a utility other than the municipal utility for service within municipal boundaries only if and when there is
a substantial inadequacy in the service the municipal utility provides to its customers and the municipality
is unwilling or unable to provide the service. City of Fort Morgan v. Colo. Pub. Util. Comm'n, 159 P.3d 87,
97 (Colo. 2007) (internal citations omitted).

74
forced to adopt a resource portfolio where an existing generation resource with a CPCN

is retired, abandoned, or rendered uneconomic, that portfolio would represent a de

facto revocation of the CPCN for that facility. 242 Similar to In re Kinder Morgan, Inc.,

submittal of such a portfolio would be invalid not only because of the lack of due

process of law, but also because economic and environmental rationale are not stand-

ins, nor prove, the required element of refusal or inability to serve customers. 243 Also,

unlike in Penn Central, not allowing Public Service to use a particular generation

resource with a Commission-approved CPCN to produce electricity would destroy the

economic uses of the facility, frustrate the utilitys investment-backed expectations

under the CPCN, and run directly counter to the ERP Rules discussed above, thus

being the very definition of a regulatory taking. The required adoption or the required

development of a resource portfolio where an existing generation resource with a CPCN

is retired, abandoned, or run at reduced capacity for economic or environmental

purposes could result in an unlawful taking.

As a final point with regard to these constitutional issues, Commissioner Koncilja

rightly raised the issue at hearing that, if CIEAs proposal were adopted and by

extension the Company was forced to retire a generation resource with a CPCN, Public

242
Additionally, Rule 3103 requires the Company to initiate a Commission proceeding to amend the
CPCNs of generation resources to restrict, to curtail, or to abandon or to discontinue without equivalent
replacement any service, service area, or facility. Aside from an improper taking, requiring Public
Service to develop or adopt an ERP portfolio abandoning any particular generation resource would also
force Public Service to file for a modified CPCN under Rule 3103, which would represent an absurd result.
243
In a recent decision regarding the City of Boulders application to municipalize electric service, the
Commission stated that a CPCN challenge cannot be sustained by claims of better or more efficient
service. Decision No. C13-1350, at 25, Proceeding No. 13D-0498E (mailed Oct. 29, 2013) (The
doctrine of regulated monopoly governs Boulder's attempt to serve unincorporated Boulder County where
Public Service is certificated. After a utility has been assigned a specific territory, no other utility may
provide service in that territory unless it is established that the certificated utility is unable or unwilling to
provide adequate service. Evidence that the challenging utility may provide better service or may serve
the customers more easily cannot be the basis of a finding that the existing utility is unwilling or unable to
serve its certificated area.)

75
Service would be entitled to just compensation. 244 Commissioner Koncilja equated just

compensation with stranded costs associated with any generation resource forced to be

retired, and noted that she had not seen any quantification of what the stranded costs

might be if we did what CIEA is recommending. 245 Ms. Jackson explained that a

quantification of the stranded costs associated with early retirement of any generation

resources is not included in the ERP because such a quantification is neither required

nor contemplated by the ERP Rules. 246 For this very reason, there is no quantification

of the stranded cost associated with the early retirement of coal-fired generation

resources owned by Public Service and cited by Mr. Monsen in Table 5 of his answer

testimony. 247 The fact that such a stranded cost analysis is not required or even

mentioned by the ERP Rules provides further evidence that Mr. Monsens proposal is

well outside and contrary to the ERP Rules as they stand today.

c. These legal issues are relevant to Strategist capabilities.

Coming full circle to the first issue raised by Mr. Monsens proposal,

consideration of the legal issues discussed above are imperative in analyzing Mr.

Monsens recommendations regarding Strategist modeling. To reiterate, Mr. Hill notes

that Strategist may be able to perform the analysis requested by Mr. Monsen, but the

extent of the models capabilities and ability to produce meaningful and useful results
244
U.S. CONST. amend. V; Hr. Tr. II, at 72:9-11 (Feb. 2, 2017) (Commissioner Koncilja stating that it
would not be a taking[] [if] there was another way to pay Public Service for the stranded costs .)
245
Hr. Tr. II, at 72:15-17 (Feb. 2, 2017).
246
Hr. Tr. II, at 72:22 73:7 (Feb. 2, 2017) (There is not [quantification of stranded costs] in this docket,
particularly because we're following the rules as they stand today. So one of the things I would say,
Commissioner Koncilja, in our conversation yesterday, you know on aligning the rulemakings; that's
something that the rules would change -- have to change in order for the company to be, you know,
obligated to present that information. Quite frankly, I'm not sure it's been -- we've never been ordered to
do that. I'm not sure we have had a robust discussion around whether or not that should be something we
do. At the same time, you know, I do understand that in order to look at some of those different aspects,
we may require legislation to go that direction.)
247
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 54:9 (filed Jan. 30, 2017).

76
using Mr. Monsens modeling parameters are unclear. However, even if Strategist is

capable of conducting the requested analyses, the Commissions ability to act upon the

results, e.g., by forcing retirement of a particular generating resource with a CPCN, is

confined by the ERP Rules and takings principles discussed above. In the absence of a

voluntary Company proposal to retire a generating resource or legislative action by the

General Assembly to accomplish the same, the modeling requested by CIEA is an

academic exercise.

In sum, Mr. Monsens recommendations with regard to Strategist modeling and

his 25% at-risk coal procurement proposal cannot be parceled out from one another

and treated as separate recommendations. Therefore, the Company requests that the

Commission reject these recommendations from CIEA and allow Strategist modeling in

the Phase II competitive solicitation to proceed consistent with the ERP Rules and past

Phase II bid evaluation processes.

vi. Discount rate

The appropriateness of the Companys proposed discount rate using its weighted

average cost of capital (WACC) of 6.78% was raised by COSEIA witness Mr. Freeman

and participants at the public hearing in this proceeding. Mr. Freeman asserted that this

discount rate is too high and discounting future fuel costs while performing a resource

analysis devalues real costs. 248 According to Mr. Freeman, use of the 6.78% discount

rate will mask the future fossil fuel costs in the PVRR determination. He instead

advocates for the use of a 3% discount rate, as that figure marks the midpoint of studies

248
Answer Testimony of Roger L. Freeman (Hr. Ex. 26), at 17:6-7 (filed Dec. 9, 2016).

77
cited in his testimony. 249 The public hearing comments offered similar sentiments, with

participants taking the position that a lowered discount rate should be used for similar

reasons.

This is not a new issue before this Commission. Indeed, in the 2007 ERP and

the 2011 ERP the use of the WACC as the discount rate was challenged by select

intervenors for a variety of reasons. 250 These intervenors argued for lowered discount

rates and brought forward arguments similar to the arguments heard in this proceeding,

including that renewables are at a disadvantage with a high discount rate, since a high

discount rate artificially makes high future fuel costs minimal on an NPVRR basis.251

The Commission rejected these arguments in both proceedings and upheld the use of

the WACC as the discount rate, which is also consistent with Commission decisions in

other types of proceedings (i.e., non-ERP proceedings). 252 In Decision No. C08-0929,

the Commission found that [t]he use of a discount rate allows us to evaluate the

relative costs of different resource selections that are produced by STRATEGIST and

reiterate[d] that the selection of resources in this docket is impacted by new factors that

249
Answer Testimony of Roger L. Freeman (Hr. Ex. 26), at 20:6-8, 20:18-19 (filed Dec. 9, 2016) (We
believe a rate of 3% as the midpoint in the US SCC studies is an appropriate rate.)
250
Decision No. C08-0929 (Hr. Ex. 37), at 281-282, Proceeding No. 07A-447E (mailed Sept. 19, 2008);
Decision No. C13-0094 (Hr. Ex. 39), at 220, Proceeding No. 11A-869E (mailed Jan. 24, 2013).
251
Decision No. C08-0929 (Hr. Ex. 37), at 282, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (Mr.
Bardwell argues for the use of a discount rate equal to the rate of inflation. He argues that this will allow
for projects to be compared on the same basis of only inflation adjusted costs. When using a discount
rate set at the inflation rate, rate stability will occur. Mr. Bardwell contends that renewables are at a
disadvantage with a high discount rate, since a high discount rate artificially makes high future fuel costs
minimal on an NPVRR basis. Finally, Mr. Bardwell argues that the evaluation of resources needs to
include such items as rate volatility, rate escalation, health and environmental issues, and resource
depletion); Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 99:3-19 (filed Jan.
30, 2017).
252
Decision No. C08-0929 (Hr. Ex. 37), at 284-287, Proceeding No. 07A-447E (mailed Sept. 19, 2008);
Decision No. C13-0094 (Hr. Ex. 39), at 221, Proceeding No. 11A-869E (mailed Jan. 24, 2013).

78
were not in the forefront in previous resource acquisition plans.253 The discount rate is

only a single tool to analyze costs of investment options, and the Commission held that

it did not wish to use the discount rate to account for factors that are more appropriately

handled on a direct basis. It is better that we account for higher fuel costs, the desire for

carbon reduction, and other issues explicitly within our analysis. 254

The logic of the Commission in 2007 remains germane to the analysis today.

COSEIA witness Mr. Freeman takes the position that [u]sing a lower discount rate will

reflect more of those future fossil fuel costs in the PVRR determinations and illustrate

the very significant economic benefits that ratepayers will realize by decisions to invest

in cost-effective renewable energy that will avoid large fossil fuel costs in the future. 255

He also testified that using a more appropriate lower rate makes solar - which has

ZERO fuel costs - look even more attractive than we believe it already is. 256 Mr.

Freeman appears to suggest that fossil fuel-fired resources should be evaluated using

one discount rate, while renewable resources should be evaluated using another

discount rate.

However, as Ms. Jackson indicated in her testimony at hearing, Public Services

proposal in this case is that the same 6.78% discount rate apply to both fossil fuel-fired

and renewable resources because the Companys customers pay for these resources

253
Decision No. C08-0929 (Hr. Ex. 37), at 284, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
254
Decision No. C08-0929 (Hr. Ex. 37), at 286, Proceeding No. 07A-447E (mailed Sept. 19, 2008) (We
find that using the average weighted cost of capital is an appropriate discount rate here for the relative
evaluation of resource portfolios. This discount rate has been used previously in resource plans and
reflects the cost to the utility and the ratepayer, of investing in certain generation facilities. We do not wish
to use the discount rate to account for factors that are more appropriately handled on a direct basis. It is
better that we account for higher fuel costs, the desire for carbon reduction, and other issues explicitly
within our analysis.)
255
Answer Testimony of Roger L. Freeman (Hr. Ex. 26), at 20:8-13 (filed Dec. 9, 2016).
256
Answer Testimony of Roger L. Freeman (Hr. Ex. 26), at 21:1-2 (filed Dec. 9, 2016).

79
through mechanisms like the electric commodity adjustment (ECA). 257 Indeed, the

majority of wind and solar costs flow through the ECA, just as fuel costs flow through

the ECA. 258 From the customers perspective, they essentially pay for both kinds of

resources as a $/MWh energy rate. 259 Thus, if the Commission were to change the

discount rate for the Companys fuel costs, it would also need to change it for renewable

resources under PPAs to have an apples-to-apples comparison and a balanced

approach to the PVRR determination, which is the metric used in the selection of

resources. 260

Mr. Freemans position also fails to account for the fact that [t]he discount rate is

simply one tool to examine relative costs of investment choices. 261 There are other

evaluation avenues available in this proceeding for the Commission to review and

quantify the benefits of renewable resources, which appears to be the goal of Mr.

Freeman and the general goal of the members of the public that raised this issue at the

public hearing. These other tools include the low and high carbon proxy pricing that the

Company proposes to use to perform sensitivity analyses in the Phase II bid evaluation

process. 262 In addition, the Company has proposed to perform high and low gas price

sensitivities. 263 The high and low gas price sensitivities will also result in either a higher

or lower PVRR for a given portfolio, which will also represent the cost changes with

regard to the uncertainty in the future price of fossil fuels. And to that point, in ERP

257
Hr. Tr. II, at 40:11-22; 44:17 45:5 (Feb. 2, 2017) (hearing testimony of Company witness Ms.
Jackson).
258
Hr. Tr. II, at 45:6-17 (Feb. 2, 2017) (hearing testimony of Company witness Ms. Jackson).
259
Hr. Tr. II, at 41:7-8 (Feb. 2, 2017) (hearing testimony of Company witness Ms. Jackson).
260
Hr. Tr. II, at 41:2-10; 41:22 42:1; 45:18-22 (Feb. 2, 2017) (hearing testimony of Company witness Ms.
Jackson).
261
Decision No. C08-0929 (Hr. Ex. 37), at 285, Proceeding No. 07A-447E (mailed Sept. 19, 2008).
262
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-262 - 2-266 (filed Jan. 30, 2017).
263
Corrected Attachment AKJ-2 (Hr. Ex. 1), at 2-181 2-182 (filed Jan. 30, 2017).

80
Volume 1 the Company provided an analysis showing the effects of the low, base and

high gas price forecasts on the alternative plans modeled pursuant to Rule 3604(k) in

Table 1.5-7 264 (excerpted below):

Alternative Plan
RAP Renewable Resource Additions
1 2 3 4
Baseline Case/Alternative Plan 1 - - - -
600 MW 100% PTC Wind - 600 MW 600 MW 600 MW
400 MW 80% PTC Wind - - 400 MW -
400 MW 30% ITC Solar - - - 400 MW
Total RAP additional Renewables 0 MW 600 MW 1,000 MW 1,000 MW

RAP Non-Renewable Additions


2 CTs 4 CTs 4 CTs 3 CTs
Large Combustion Turbine (CT)
410 MW 820 MW 820 MW 615 MW
1 CCs
2x1 Combined Cycle (2x1 CC) - - -
700 MW
Total RAP additional Non-Renewables 1110 MW 820 MW 820 MW 615 MW

2016-2054 PVRR Deltas from Baseline ($M)


Low Gas Prices $0 ($210) ($210) ($190)
Base Gas Prices $0 ($440) ($590) ($570)
High Gas Prices $0 ($740) ($1,100) ($1,080)

The Company will conduct the same analysis in the Phase II bid evaluation with the

actual bid portfolios constructed based upon bids received, and will do the same with

the carbon proxy pricing values as well. The benefits of renewable-heavy bid portfolios

will be quantified under low gas, high gas, low carbon, and high carbon futures.

Therefore, this Commission will have several tools at its disposal to evaluate the costs

and benefits of bid portfolios containing renewable resources, which is exactly the point

made by the Commission in the 2007 ERP.

No party has made a showing that use of the WACC as the discount rate fails to

constitute an appropriate discount rate as required by Rule 3602(j). 265 It is anticipated


264
Corrected Attachment AKJ-1 (Hr. Ex. 1), at 1-59 (filed Jan. 30, 2017).

81
that the use of a lower discount rate will give a particular bid portfolio a different PVRR,

but it is unclear if it would actually change the PVRR ranking of the bid portfolio where

all bid portfolios are being evaluated pursuant to a lower discount rate. 266 The

Company believes the proposed gas price sensitivity discussed above is perhaps a

more transparent and easily understood method as compared to the discount rate

sensitivity. Nevertheless, Public Service is willing to model a sensitivity case using a

lower single discount rate that is applied to all portfolio cost streams in the Strategist

model, if the Commission believes it is appropriate. The Company recommends using a

single 3% discount rate for this sensitivity.

vii. Surplus capacity credit

The ERP includes a surplus capacity credit for use in the Phase II bid evaluation

process. This credit applies where a bid portfolio includes more generation capacity

than that needed to meet the 16.3% reserve margin target, and the credit reduces the

cost of the particular portfolio. 267 Such a credit is appropriate because, as set forth in

ERP Volume 2, having a surplus capacity margin in a future year results in excess

capacity that could potentially be sold by the utility (predicated on finding a willing

counterparty) and readily monetized or can offset a requirement to procure capacity in

a later year. 268 In its direct case, Public Service proposed that up to 200 MW of surplus

capacity credit be provided for at a credit of $2.79/kW-mo for four months of each year

within the RAP (2016-2023). For 12 months of each year beyond the RAP (2024-2054),

265
4 C.C.R. 723-3-3602(j).
266
Hr. Tr. II, at 95:8-16 (hearing testimony of Company witness Mr. Hill that changing the discount rate
that is used to create a present value revenue requirement would certainly change the PVRR for a
specific plan. Whether or not that would result in a change in the deltas between plans, I can't say.)
267
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 51:14-17 (filed Jan. 30, 2017).
268
Corrected Attachment AKJ-2, at 2-249 (Hr. Ex. 1) (filed Jan. 30, 2017).

82
the Company proposed up to 500 MW of surplus capacity credit be provided for at the

cost of a generic combustion turbine. 269

Both Staff and CIEA raised issues with the surplus capacity credit, with Staff

witness Ms. Podein arguing that the level of the surplus capacity credit should be

reduced to 100 MW both during the RAP and post-RAP, respectively. 270 CIEA witness

Mr. Monsen asserted that the surplus capacity credit should be increased during the

RAP to 500 MW, allowing for a symmetrical surplus capacity credit amount of 500 MW

during both the RAP and post-RAP periods. 271

The Company agrees with Ms. Podeins rationale for decreasing the surplus

capacity credit both during the RAP and post-RAP periods, while retaining the

Companys proposed credit pricing during these two periods. Ms. Podein

recommended that the Company proceed with caution when acquiring any excess

capacity given the pace of technological innovation and decline in manufacturing and

installation costs for renewable resources, among other things. 272 Moreover, Company

witness Mr. Hill noted in his rebuttal testimony that the alternative plan modeling

required pursuant to Rule 3604(k) showed no need for the large CC unit that formed

part of the basis for the 500 MW level of surplus capacity initially proposed by the

269
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 51:17-20 (filed Jan. 30, 2017).
270
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 16:17-22 (filed Dec. 9, 2016) (Staff could
support a surplus capacity credit up to 100 MW to be used during both periods of the ERP: the resource
acquisition period (RAP) and the subsequent period extending to the end of the planning period. Staff
believes the 100 MW value accommodates a somewhat lumpy resource acquisition and accounts for
opportunities with a competitive resource solicitation without distorting the economic value of any
resource(s) being acquired.)
271
Public Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 40:3-5 (filed Jan. 30, 2017).
272
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 16:1-6 (filed Dec. 9, 2016)

83
Company. 273 These same factors in turn counsel against adoption of CIEA witness Mr.

Monsens proposed expansion of the surplus capacity credit during the RAP period.

The Company therefore agrees with Staff that its initial surplus capacity credit

proposal should be modified in the Phase I decision. Consistent with this agreement,

Public Service requests that a surplus capacity credit of up to 100 MW be approved by

the Commission at a credit of $2.79/kW-mo for four months of each year within the RAP

(2016-2023) and 12 months of each year beyond the RAP (2024-2054) provided for at

the cost of a generic combustion turbine. 274

D. Approving the necessary studies.

The Company seeks approval of six studies in this proceeding for use in the

Phase II competitive solicitation. In the rebuttal testimony of Company witness Ms.

Jackson, she set forth the studies the Company seeks approval of through this

proceeding in Table AKJ-3 275 (excerpted below):

Study Report 2016 ERP


Attachment
Number
An Integration Cost Study for Solar Generation Attachment KLS-1
Resources on the Public Service Company of
Colorado System

An Effective Load Carrying Capability Study of Attachment KLS-2


Existing and Incremental Solar Generation
Resources on the Public Service Company of
Colorado System

4 GW Wind Integration Cost Study Attachment KLS-3


on the Public Service Company of Colorado System

273
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 53:1-3 (filed Jan. 30, 2017)
(noting that Figure 1.5-2 in Corrected Attachment AKJ-1 shows the 600 MW Rush Creek Wind Project in
Alternative Plan 2 eliminating the 700 MW CC included in Alternative Plan 1).
274
Corrected Revised Rebuttal Testimony of James F. Hill (Hr. Ex. 4), at 51:17-20 (filed Jan. 30, 2017).
275
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 90:1 (filed Jan. 30, 2017).

84
An Effective Load Carrying Capability Study of Attachment KLS-4
Existing and Incremental Wind Generation
Resources on the Public Service Company of
Colorado System

Wind and Solar-Induced Coal Plant Cycling and Attachment KLS-5


Curtailment Costs on the Public Service Company of
Colorado System

An Expanded Study of 30-Minute Flex Reserve Attachment DTB-1


on the Public Service Company of Colorado System

All of these studies were supported through the Companies direct and rebuttal

testimonies, as well as through supplemental direct testimony. 276 Ms. Jackson further

explained that a fourth study from Proceeding No. 16A-0117E, entitled Public Service

Company of Colorado 2 GW and 3 GW Wind Integration Cost Study, was formally

moved to this proceeding, but the Company is not seeking any formal action from the

Commission on this study since the 4 GW wind integration cost study (Attachment KLS-

3) is more recent and analyzes the costs associated with higher levels of wind

integration.277

The issues in dispute among the parties relating to these studies are whether (1)

the Expanded Flex Reserve study included as Attachment DTB-1 should be approved,

and (2) the Company should expand the Flex Reserve study, wind integration study,

coal cycling/wind curtailment study, and wind ELCC study to a 4.5 GW level in advance

276
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 90:7 91:2 (filed Jan. 30,
2017).
277
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 90:4-7 (filed Jan. 30, 2017).

85
of the Phase II competitive solicitation. 278 Setting these two issues aside, which are

discussed below, the Company requests that the Commission approve all other studies

as they are unopposed by any party to the proceeding.

i. The Expanded Flex Reserve study

The Company is a national leader in the safe and reliable integration of variable

energy resources such as wind. 279 This leadership is reflected in the Expanded Flex

Reserve study approach and methodology, which considers the acquisition of up to

1,000 MW of additional wind in addition to the 600 MW and 800 MW portfolios analyzed

in the previous Flex Reserve analysis; that is, it examines wind portfolios up to 4,174

MW of total installed wind. 280 The Expanded Flex Reserve study methodology retained

the 30-minute Flex Reserve requirement used in prior Flex Reserve analyses but

featured three refinements: (1) any wind ramps that included curtailment events were

eliminated so that only wind ramps caused by loss of wind speed were included in the

analysis; (2) the Flex Reserve requirement was adjusted to be based upon a 4th-order

polynomial curve fit to ensure it covered the very largest wind ramps; and (3) the Flex

278
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 33:5-9 (Hr. Ex. 8) (filed Jan. 30,
2017).
279
Hr. Tr. III, at 119:10-19 (Feb. 3, 2017) (hearing testimony of Mr. Bartlett: The key distinction here is
that the National Renewable Energy Laboratory, they typically are coming to us to say: How high are you
addressing this; because you have more wind generation than anybody else and you are hitting these
issues first. And so we are happy to confer with them and we do regularly. The Utility Variable Integration
Group is another group we confer with. Again, we tend to be on the leading edge of things as opposed to
taking in ideas from others); Hr. Tr. III, at 125:9-23 (Feb. 3, 2017) (hearing testimony of Mr. Bartlett:
When the FERC was first proposed, the FERC specifically cannot propose rules for reliability standards
around things like high renewable penetration and FERC deferred basically to the industry that as the
industry developed experience with higher levels of renewable generation, that we could propose rules for
how, you know, how we could reliably integrate that renewable generation. So the flex reserve tariff that
was approved by FERC is an example of the industry doing that. So to answer your question, there are
no specific standards. PSCo, because of our position as a leader in wind generation, we have more than
our peers, we have been setting the standard.) Supplemental Direct Testimony of Drake T. Bartlett (Hr.
Ex. 9), at 12:16-19 (filed Nov. 15, 2016) (Since first adding Power Purchase Agreement (PPA) wind
resources to our portfolio of resources in 1998, we have become a frontrunner in the area of wind
integration by committing time and resources to studying wind integration.)
280
Supplemental Direct Testimony of Drake T. Bartlett (Hr. Ex. 9), at 12:5-8 (filed Nov. 15, 2016).

86
Reserve amount was capped at the size of the largest observed wind ramp for each

analyzed portfolio as opposed to the apex of the polynomial curve to ensure the Flex

Reserve requirement covered the largest wind ramps but was not greater than

necessary. 281 Company witness Mr. Bartlett explained that these types of refinements

are not unusual; rather, the Company regularly refines its analysis based on operational

experience to continue to get variable energy resource integration, and by extension its

Flex Reserve requirement, just right in an ever-changing environment.

The Expanded Flex Reserve study should be approved by the Commission.

SWG and CIEA offered testimony that the Flex Reserve requirement should be

increased, while OCC argued that the Company has not included all of the resources

that could provide Flex Reserve for the Public Service system. WRA also provided

testimony addressing the Expanded Flex Reserve study. SWG and CIEA

understandably want to see greater resource development opportunity for the IPP

community in the form of an increased Flex Reserve requirement, while OCC wants to

see a decreased Flex Reserve requirement to avoid unnecessary costs to customers

and WRA does not want to see unnecessary investments in additional Flex Reserve

resources, 282 which tend to be fossil-fired resources. In sum, all of these parties are

advocating for their own self-interests, which is to be expected. But that does not mean

the arguments have merit. These arguments do not provide any bases upon which to

deny the requested approval of the Expanded Flex Reserve study.

SWG witness Mr. Mooren offers two core arguments: (1) the 12-month study

period is insufficiently short, and (2) the Company should require that Flex Reserve

281
Supplemental Direct Testimony of Drake T. Bartlett (Hr. Ex. 9), at 13:5 14:8 (filed Nov. 15, 2016).
282
Cross-Answer Testimony of Andrew Goggins (Hr. Ex. 23), at 8:18-19 (filed Jan. 17, 2017).

87
resources be able to reach full generation output within 15 or 20 minutes versus the

current 30-minute requirement. 283 Mr. Mooren fails to establish that the 12-month data

set used by the Company is inappropriate or that it somehow fails to account for large

wind ramps not included in the data set. To the contrary, the Company has used

similarly-sized data sets in past studies, and has found through operating experience

that the requirement determined in this manner was adequate to ensure system

reliability. 284 The claim that the 12-month data set excludes larger wind ramp is also

baseless because the largest wind ramp events highlighted by Mr. Mooren either do

not qualify as Flex Reserve events, or are simply false ramps caused by bad data.285

Moreover, Mr. Mooren provides no evidence that the 30-minute Flex Reserve

requirement should be shortened to 15 or 20 minutes. The 30-minute requirement is

appropriate because, as Mr. Bartlett testified, the largest 30-minute ramps are the most

extreme ramps embedded within larger and longer wind ramp events; system

dispatchers are aware of them and offline generation resources available within 30

minutes are sufficiently responsive to provide Flex Reserve. 286 Finally, both Mr.

Mooren and CIEA witness Mr. Monsen argue that more Flex Reserves are needed, but

fail to take the effects of geographic diversity into account in their respective

analyses. 287 Therefore, their respective calculations should be set aside by the

Commission.

283
Answer Testimony of Matthew Mooren (Hr. Ex. 27), at 4:13 5:5 (filed Dec. 9, 2016).
284
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 15:7-9 (filed Jan. 17, 2017).
285
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 12:13-15 (filed Jan. 17, 2017).
286
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 12:16-19 (filed Jan. 17, 2017).
287
See Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 25:17 27:9 (filed Jan. 17, 2017)
(addressing why Mr. Monsens calculation is misleading and how it ignores the effects of geographic
diversity.)

88
OCC witness Mr. Neils analysis trends in the other direction. In his cross-

answer testimony, he offers Table CN-14, which purports to show Flex Reserves 20-

and 30-Minute Off-Line Capacity. 288 This table, however, significantly overstates the

amount of Flex Reserve available. For example, it includes 185 MW associated with

resources in the Interruptible Service Option Credit (ISOC) program, which are only

available for a limited number of hours each year and cannot be relied upon for Flex

Reserve purposes. 289 The optimal usage of the ISOC resource is for peak shaving

during high load hours when system costs are also high, not for Flex Reserve. 290 Mr.

Neil also includes over 600 MW associated with the Joint Dispatch Agreement (JDA)

the Company has entered into with Black Hills and Platte River Power Authority

(PRPA). This generation capacity from PRPA and Black Hills units does nothing to

address the Flex Reserve capacity requirement because the JDA creates an energy-

only imbalance market. 291 These are just two examples of shortcomings with Mr. Neils

analysis, but they illustrate that his analysis cannot and should not be relied upon by the

Commission to determine or influence the Flex Reserve requirement in any way.

Staff takes the middle ground, asserting that the Expanded Flex Reserve study

should be approved but requesting that the Company update the study before filing the

288
Cross-Answer Testimony of Chris Neil (Hr. Ex. 20), at 13:1 (filed Jan. 17, 2017).
289
Hr. Tr. III, at 90:14-21 (Feb. 3, 2017) (hearing testimony of Mr. Bartlett: The interruptible service ISOC
program is a Demand Side Management program. There are a very limited number of hours that those
resources can be called upon. And so in operating practice, the way that we utilize the ISOC program for
the maximum economic benefit for our customers is we look at our very largest peak hours where we
typically are -- it's the most expensive to serve that peak period.)
290
Hr. Tr. III, at 90:21-25 (Feb. 3, 2017) (hearing testimony of Mr. Bartlett: And we essentially perform
peak shaving, where we schedule an ISOC event to coincide with those peak hours when we have peak
pricing; and we reduce the capacity need at that time which reduces costs for our ratepayers.)
291
Joint Dispatch Service Agreement (Hr. Ex. 74); Hr. Tr. IV, at 29:16 30:14 (Mr. Neil discussing the
JDA with SWG counsel at hearing).

89
2019 ERP. 292 Staff witness Ms. Podein concluded that the Flex Reserve analyses

provided in this proceeding support the conclusion that sufficient flex reserve capability

exists to accommodate 1000 MW of additional wind through the Phase II competitive

solicitation. 293 Ms. Podein further provided that the Flex Reserve methodology should

be revisited and the study updated before the 2019 ERP. 294 Company witness Mr.

Bartlett testified that Public Service agrees with Ms. Podein that the study should be

updated prior to the 2019 ERP. 295

Ms. Podein further recommended, however, that in performing this update

Public Service and Staff work together in forming a panel that would reach out to

industry experts from such organizations as NCAR and NREL to set a scope of work for

the back-cast and any subsequent revisions necessary to establishing flex reserve

capacity. 296 The Company does not agree with this component of Ms. Podeins

recommendation. Mr. Bartlett testified at hearing and in his rebuttal testimony regarding

the outreach the Company does to entities like NREL and NCAR in the course of

developing studies, 297 but the Company does not support the use of technical review

292
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 4:12-16 (filed Dec. 9, 2016).
293
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 5:13-14 (filed Dec. 9, 2016).
294
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 5:14 6-3 (filed Dec. 9, 2016).
295
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 28:21 29:4 (filed Jan. 17, 2017) (The
Company agrees with Ms. Podein that an update to the Flex Reserve study should be performed prior to
the next ERP since new information, specifically the size and location of any new wind farms selected in
the Phase II competitive solicitation and any available wind speed and generation data associated with
these new wind farms, would inform the Flex Reserve requirement for future wind generation portfolios.)
296
Answer Testimony of Sharon L. Podein (Hr. Ex. 16), at 13:16 14:2 (filed Dec. 9, 2016).
297
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 30:3-9 (filed Jan. 17, 2017) (The Company
does not support Ms. Podeins recommendation that a panel be formed to assist with a scope of work for
the back-cast and any subsequent revisions necessary to develop this update. At the outset, it should be
understood that the Company already works with the organizations named by Ms. Podein, in addition to
other industry experts on wind issues, on a regular and continuing basis. We do not believe that it is
necessary to formally convene a panel to assist in an update of the Expanded 2016 Flex Reserve Study.)

90
committees (TRCs) or panels when it comes to real-time operations studies. 298 Use of

TRCs or panels are not appropriate for real-time operations studies because it is the

Company, not the TRC or panel members, that is ultimately responsible for the reliable

operation of the system.

In sum, the Commission should approve the Expanded Flex Reserve study for

use in the Phase II process, as discussed below, and order the Company to revisit its

methodology and update the Flex Reserve analysis prior to the 2019 ERP. In doing so,

the Commission should not adopt Ms. Podeins recommendation that a TRC or panel be

convened for purposes of this Flex Reserve study update.

ii. Study expansion to 4.5 GW

Another Flex Reserve issue is WRA witness Ms. Farnworths recommendation

that the Company expand the Flex Reserve analysis to 5 GW and 6 GW prior to

commencement of Phase II. 299 The Company agrees that the Expanded Flex Reserve

study should be expanded prior to Phase II, but the Company only believes it should

study the Flex Reserve requirement for portfolios of varying degrees of geographic

298
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 30:15 31:4 (filed Jan. 17, 2017) (We are
certainly not opposed to using technical review committees or panels in developing certain types of
studies. In fact, we have employed such groups in the past on planning studies that analyze issues such
as effective load carrying capability (ELCC), coal cycling costs, and renewable energy integration costs.
As a matter of Company practice, however, we draw a distinction in the use of technical review
committees or panels for planning studies versus real-time operations studies. We collaborate with these
committees or panels for the former but not for the latter. The reason that we make this distinction is
because real-time operations studies implicate system reliability, and the Company is the party
responsible for system reliability. Consequently, the Company retains decision-making authority
concerning maintaining reliability -- such as ensuring sufficient Flex Reserve capability through adequate
and accurate studies.)
299
Answer Testimony of Gwendolyn Farnsworth (Hr. Ex. 22), at 3:12-15 (filed Dec. 9, 2016). Ms.
Farnworth also recommends that the Company assume Load Commutated Inverters (LCIs) are installed
at all existing gas generators in any updated study. Answer Testimony of Gwendolyn Farnsworth (Hr. Ex.
22), at 3:13-15 (filed Dec. 9, 2016).

91
diversity up to 4.5 GW of wind generation capacity prior to Phase II of this ERP. 300 As

explained by Company witness Mr. Bartlett, further investigation of the current

methodology and its ability to go up to a 5 GW and 6 GW level is necessary before

expanding the study to those levels, however, Public Service does not have time to

perform the required investigation prior to commencement of the Phase II competitive

solicitation. 301 The Company is comfortable with an expansion to 4.5 GW, and believes

it is appropriate under the circumstances and should be approved by the Commission.

If the Commission approves the expansion of the Flex Reserve analysis to 4.5

GW, the Company also believes it should expand the wind integration study, coal

cycling/wind curtailment study, and wind ELCC study to a 4.5 GW level in advance of

the Phase II competitive solicitation. 302 It is necessary to conduct updates to these

studies in parallel with the Flex Reserve update. If approved by the Commission, the

Company proposes to file these updated studies as compliance filings in this

proceeding prior to or contemporaneous with the commencement of the Phase II

competitive solicitation.

E. Determining any appropriate sensitivities.

The potential for various sensitivities to be performed during the Phase II bid

evaluation process were discussed extensively at hearing. Company witness Mr. Hill

300
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 34:12-15 (filed Jan. 17, 2017).
301
Rebuttal Testimony of Drake T. Bartlett (Hr. Ex. 10), at 33:13-21 (filed Jan. 17, 2017) (As the
Company extrapolates the existing wind generation profiles to larger and larger wind generation portfolios,
our confidence decreases that the resulting profile accurately represents the variability of that portfolio.
Recall that the Company already has the highest wind penetration in the nation relative to the size of our
Balancing Authority Area. We have been able to cost-effectively and reliably integrate our current portfolio
by adding wind generation capacity at a measured pace. To quickly double our wind generation capacity
to 5 GW from our current 2.56 GW without further analysis of our methodology could expose our
customers to increased costs.)
302
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 33:5-9 (Hr. Ex. 8) (filed Jan. 30,
2017).

92
testified that while sensitivities can be run from a modeling standpoint, it is important to

keep in mind the amount of information being created and providing a manageable

amount of information and data for the Commission to review prior to approving a
303
resource portfolio in Phase II. The Company believes managing the amount of

information to preserve the ability for meaningful Commission review should be the

guiding principle in determining which sensitivities to order, and this appears to be

consistent with comments from Chairman Ackermann at hearing. 304 The concern about

information overload is particularly acute given the low, medium, and high resource

need range approach, which if approved will triple the amount of information the

Commission will receive regarding the resource portfolios in the 120-Day Report. 305

Against that backdrop, the Company has proposed to run high and low gas price

sensitivities, as well as low and high carbon proxy price sensitivities. By Public

Services count, other sensitivities discussed over the course of the proceeding and the

hearing were: (1) a sensitivity based on the SIC; (2) a sensitivity based on a lower

discount rate; and (3) a coal price sensitivity. 306

With respect to the SCC sensitivity, the Company has outlined earlier in this SoP

why it believes such a sensitivity to be inappropriate and unnecessary. The low and

303
Hr. Tr. II, at 241:16-17 (Feb. 2, 2017).
304
Hr. Tr. II, at 241:20 242:5 (Feb. 2, 2017).
305
Hr. Tr. II, at 173:24 174:14 (Feb. 2, 2017) (testimony of Company witness Mr. Hill at hearing: I think
any of the sensitivities don't require or obligate anything, but I think we need mindful of the level of work
that's being asked of the company to perform, within 120 days. We are already going to be doing
analyses of three different levels of the need. We also will be doing optimizations of three different levels
of -- with two different fillers if you will, backfills. This is an enormous undertaking. We basically turned
this ERP, with those three levels, into almost like doing three times the work within 120 days. So, I'm
reluctant, and I want to just inform the Commission, that what we're proposing here is going to be an
enormous amount of work to get it done within the time frame.)
306
See, e.g., Hr. Tr. I, at 161:3-15 (Feb. 1, 2017) (addressing SCC sensitivity); Hr. Tr. II, at 226:12-24
(Feb. 2, 2017) (addressing discount rate sensitivity); Hr. Tr. II, at 226:1 227:11 (Feb. 2, 2017)
(addressing coal price sensitivities).

93
high carbon proxy price sensitivities provide more than sufficient additional analysis

based upon potential future carbon regulation, particularly given the current state of

carbon regulation and uncertainty surrounding it. As to the discount rate sensitivity,

Public Service noted in this SoP that it is willing to run a low single discount rate

sensitivity (e.g., 3%) if the Commission believes such a sensitivity is appropriate.

Finally, with respect to the coal price sensitivity, Public Service does not believe this will

be useful for the Commission because low and high coal price forecasts typically fall in

a narrow band. Accordingly, a low and high coal price sensitivity would be unlikely to

significantly affect the PVRR of the different resource portfolios and may result in the

inclusion of extraneous information in the 120-Day Report package that does not

provide additional value to the Commission in its Phase II evaluation process.

F. The role of the IE.

The Company informed the Commission at hearing that it had reached

agreement with Staff and OCC to have Accion Group, LLC (Accion) serve as the IE in

this proceeding, and that Accion indicated its interest in doing so. At the close of

hearing, Chairman Ackermann asked the parties to comment in SoPs regarding the use

of the IE in this process and this section responds to that request. 307

Generally speaking, the Company believes the IE should be used consistent with

Rule 3612. 308 The IE should focus its efforts on ensuring the bid evaluation is

conducted fairly, with a specific focus on relevant issues that have been raised in this

307
Hr. Tr. IV, at 159:6-14 (Feb. 6, 2017) (Then my only other thought had to do with the independent
evaluator themselves as to we have had different iterations of use of an IE over the years and it would be
helpful advice as to how to best use the independent evaluator in this process. What are the specific
questions, what are the check points, what are the things we as the Commission should be looking at
inspecting with that independent evaluator versus just waiting for that companion report, et cetera.)
308
4 C.C.R. 723-3-3612.

94
proceeding. This includes the application of the respective filler methods (i.e., the

replacement method and annuity method) depending upon how these issues are

ultimately adjudicated by the Commission. Other relevant focus areas for the IE include

the application of the GPVM Adder and ensuring that, to the extent Company-ownership

proposals are received in the Phase II competitive solicitation, these bids are evaluated

on a level playing field with IPP ownership proposals. There is no need for the IE to

engage in any type of shadow modeling or any other functions that go beyond

monitoring the bid evaluation process.

The low, medium, and high resource need range approach, if approved, will also

render this Phase II competitive solicitation slightly different than prior Phase II

competitive solicitations. However, from the perspective of determining the appropriate

role for the IE, the Company believes that the Commission should not modify the IEs

role. The IE should focus on the bid evaluation process and should not offer an opinion

on which of the resource need scenarios is most appropriate. Rather, the Company will

propose a preferred resource need scenario based on the latest information available,

including the four categories of uncertainty. In sum, the IEs role should not expand

beyond the traditional bid evaluation role as contemplated by Rule 3612 if the low,

medium, and high resource need range approach is approved by the Commission.

G. Miscellaneous issues.

Several miscellaneous issues arose over the course of this proceeding,

specifically: (1) whether it is appropriate to use statewide or service territory-specific

economic indicators in sales and peak demand forecasting; (2) whether the potential

City of Boulder municipalization should be accounted for in determining the resource

need in this proceeding; (3) whether storage bids will be accepted in the Phase II

95
competitive solicitation; (4) whether the Southwestern Public Service (SPS) Diversity

Exchange conflicts with the prohibition on coal-fired bids in the Phase II competitive

solicitation; (5) whether the Commission should open a separate proceeding to address

O&M actuals for utility owned projects as compared to estimates; and (6) whether the

Commission should adopt a coal supply reporting requirement.

i. Economic indicators

In its direct case, the Company used forecasts of economic indicators for the

entire state of Colorado obtained from IHS Global Insight, Inc. (IHS). 309 The indicators

include personal income per household and gross state product; moreover, total

employment for the state of Colorado was used in the Monte Carlo simulation process

to develop the probability distributions for the Companys total energy forecast. 310 Staff

witness Ms. ONeill described in her answer testimony that the use of statewide

economic indicators should be discarded and that these inputs should instead reflect

Public Services service territory only. In preparing her answer testimony, Ms. ONeill

conducted what in her words was a very simple analysis, and ultimately concluded

that the adjusted economic factors would result in an additional 152 MW of expected

peak load in 2023. 311

Public Service took Staff up on this proposal to adjust its economic indicators to

determine whether the use of service territory-specific economic indicators would

produce the types of changes suggested by the initial result of Ms. ONeills analysis.

309
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 11:15-16 (filed Jan. 30, 2017).
310
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 11:16-20 (filed Jan. 30, 2017).
311
Answer Testimony of Erin ONeill (Hr. Ex. 14), at 12:8-10 (filed Dec. 9, 2016) (Based on a very simple
comparison of the economic growth assumptions used by the Company and the resulting peak load
forecast, Staff estimates that the adjusted economic factors would result in an additional 152 MW of
expected peak load in 2023.)

96
Ms. ONeills analysis excluded specific Metropolitan Statistical Areas (MSAs), as well

as Colorado territory outside of the major MSAs, from the statewide data. 312 The

Company took a slightly different approach directed towards the same ends, and

Company witness Ms. Marks obtained and summed the forecasts for the following

MSAs in Public Services electric service territory: (1) Boulder; (2) Denver-Aurora-

Lakewood; (3) Grand Junction; and (4) Greeley. 313 The forecasts for economic

indicators for these MSAs were aggregated and compared to the statewide economic

indicators. 314 Table JEM-1 in the rebuttal testimony of Company witness Ms. Marks

(excerpted below) 315 showed the results of this comparison, with some economic

indicators performing stronger in the aggregated MSAs and some showing better results

in the statewide forecast:

Economic Indicator State Forecast Aggregated MSA Forecast

Real Gross State/Metro Product 2.8% 2.6%

Real Personal Income 3.2% 3.3%

Employment 1.6% 1.8%

Population 1.5% 1.7%

The results of this comparison showed a statistically insignificant difference as between

the aggregated MSAs and the state forecast, and it further showed that the state

312
Answer Testimony of Erin ONeill (Hr. Ex. 14), at 10:3-14 (filed Dec. 9, 2016)
313
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 13:6-9 (filed Jan. 30, 2017). These
MSAs do not perfectly align with the Companys service territory but were the most representative
possible given the MSAs studied by IHS. Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12),
at 15:11-12 (filed Jan. 30, 2017).
314
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 13:11-14 (filed Jan. 30, 2017).
315
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 14:1 (filed Jan. 30, 2017).

97
forecast was higher than the aggregated MSAs in the first category above. 316 The

Company also used the aggregated MSA economic indicators above to produce a peak

demand forecast. Unlike Staff witness Ms. ONeills forecast, which showed a

significant increase in the resource need of 152 MW, the Companys analysis using this

data showed an increase of only 12 MW at the end of the RAP. 317

The Company therefore conducted the analysis proposed by Staff, and the

results did not reveal statistically significant changes for any single economic indicator

or the peak demand forecast as a whole. To the same point, at hearing Staff witness

Mr. Camp noted that the Company had conducted this analysis, and he concluded that

in this particular ERP it has not made a difference and thus did not believe any further

analysis was necessary in this proceeding. 318 In the absence of significant differences

as between the aggregated MSAs and the statewide figures, the Company believes it is

316
Hr. Tr. III, at 132:16-18 (Feb. 3, 2017) (testimony of Ms. Marks at hearing that when we use the
[aggregated MSAs] information to produce a forecast, it did not derive a significantly different forecast.)
317
Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 14:11 15:2 (filed Jan. 30, 2017)
(New forecasts of residential use per customer and commercial and industrial sales were developed
using IHSs December 2016 release of the aggregated MSA economic indicators. These new forecasts
were then used to develop peak demand forecasts. No other changes were made to any inputs or
assumptions in the forecasting process. The peak demand forecast based on the aggregated MSA
economic indicators was 12 MW higher (0.2 percent) in 2023 than the peak demand forecast based on
the state economic indicators.)
318
Hr. Tr. III, at 230:16 231:9 (Feb. 3, 2017) (hearing testimony of Mr. Camp: You need to understand
this was written at the time we are doing the answer and this recommendation was that the Company
should be using the forecasting or the forecasting model should reflect the service territory as best as
possible. I think Ms. Marks actually did that analysis. I don't think it is anything that you need to request.
She has already done that. I think in this particular ERP it has not made a difference. I think it would be
helpful if the Commission gave some guidance going forward whether they should be using the entire
state, which I think Staff would not recommend that, and I think it was demonstrated it was not that
difficult to generate a territory or something closer to what is their territory to do a forecast and I think that
should just be the practice going forward. I think that it would be helpful for the Commission to give that
guidance going forward.)

98
appropriate to continue to use state economic indicators for sales and peak demand

forecasting going forward into the 2019 ERP. 319

ii. The City of Boulder load

The uncertainty surrounding the potential City of Boulder municipalization and its

potential effect on future resource needs was briefly raised by OCC witness Mr. Neil in

his answer testimony. 320 Company witness Ms. Jackson explained why the Company is

not reducing its resource need to account for the potential City of Boulder

municipalization in her rebuttal testimony:

Even if the City of Boulder pursues its municipalization, it is possible that it


may remain as a wholesale customer of Public Service for some period of
time. Furthermore, the timing of the City of Boulders possible departure
remains unclear. The City of Boulder recently filed its Second
Supplemental Verified Application in Proceeding No. 15A-0589E on
September 28, 2016. The proceeding is in its early stages and numerous
uncertainties remain regarding the parameters around which the City of
Boulder may exit the Public Service system and the nature of the City of
Boulder and Public Services relationship going forward. Moreover,
Proceeding No. 15A-0589E is only one of several proceedings that must
be adjudicated addressing numerous and complex issues including,
without limitation, condemnation and stranded costs. The associated
regulatory approvals in these proceedings must be obtained before the
City of Boulder can proceed with municipalizing its system and will take
years to obtain; therefore, the outcome of these proceedings are uncertain.
That in turn may affect the manner and associated effect on the Public
Service system of a City of Boulder municipalization. This renders the
potential departure of the City of Boulder different than other events that
may affect the resource need in this proceeding. For example, more
information is known regarding the potential effects of future electric
service requests from the oil and gas industry operating in Colorado

319
This approach also allows the Company to rely on one set of indicators for both its electric and gas
sales forecasts. Corrected Rebuttal Testimony of Jannell E. Marks (Hr. Ex. 12), at 15:17-22 (filed Jan. 30,
2017) (Public Service uses the same state economic indicators to develop both electric and gas sales
forecasts. Public Services electric and gas service territories are not the same, as the gas service
territory also includes Fort Collins and Pueblo, and excludes Greeley. By using the state economic
indicators, Public Service can rely on only one set of indicators for all of its forecasting needs.)
320
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 10:1-12 (filed Jan. 30, 2017).

99
because the actual requests have been made and are not pending before
the Commission in an adjudicatory proceeding. 321

Public Service must plan its system to account for the City of Boulder load until the City

of Boulder has obtained all of the necessary approvals and is authorized to serve

customers as a municipal utility. 322 In addition, in determining how the potential City of

Boulder municipalization should be treated in this 2016 ERP, it is telling that the City of

Boulder, an intervenor in this proceeding, did not itself advocate for: (1) a reduction in

the resource need over the RAP; (2) a shorter RAP; or (3) for consideration of the affect

that its Gradual Departure Plan proposed in Proceeding No. 15A-0589E may have on

this proceeding. To the contrary, the City of Boulder did not file any testimony, did not

put on any witnesses, and did not conduct any cross-examination in this proceeding.

As a final point, the consensus surrounding the low, medium, and high resource

need approach also supports moving forward in this proceeding without downwardly

adjusting the resource need to account for the potential City of Boulder municipalization.

Staff witness Ms. ONeill testified about this uncertainty in her surrebuttal testimony

addressing the low, medium, and high resource need range approach. Ms. ONeill

identified the potential City of Boulder municipalization as a significant uncertainty in the

out years of the RAP, but also noted that [n]o one knows, with any certainty, what the

capacity needs of Boulder will be under a future municipality paradigm. 323 She further

provided that the low, medium and high resource need scenarios represent an

appropriate path forward based on what is known at this time and that [i]t is also

321
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 29:7 30:6 (filed Jan. 30,
2017).
322
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 28:8-12 (filed Jan. 30, 2017).
323
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 9:12-13 (filed Jan. 30, 2017).

100
important to remember that the Commission and parties will have an opportunity to

evaluate the state of any City of Boulder municipalization in the 2019 ERP, which will be

filed on or before October 31, 2019. 324 This reasoning from Ms. ONeill further

supports the conclusion that the potential City of Boulder municipalization should not

result in a reduction to the resource need in this proceeding.

iii. Storage bids

The future of storage was a popular topic at the public hearing in this proceeding.

While the Company did not model any incremental storage projects as part of its Phase

I modeling, storage bids will be accepted in the Phase II competitive solicitation and, as

stated by Company witness Mr. Hill at hearing, we certainly have an interest in

soliciting and receiving storage bids, and examining them as part of the portfolio

analysis. 325 Company witness Mr. Scholl testified that the modeling procedures put in

place would capture the vast majority of the full value of storage. 326 His rebuttal

testimony also provides extensive discussion of this valuation methodology and

recommend[s] that the Commission determine that the Companys proposed energy

324
Surrebuttal Testimony of Erin ONeill (Hr. Ex. 15), at 9:20 10:7 (filed Jan. 30, 2017) (Staff believes
the low, medium and high resource need scenarios represent an appropriate path forward based on what
is known at this time. The results provided by those analyses will provide a range of results that may be
considered by the Commission. The Commission can then make its decision in light of the uncertainty
regarding Boulder's departure from the Public Service system sometime in the future. The Commission
could then be cautious about selecting energy resources that are projected to provide only marginal
customer savings that may disappear under a future Boulder departure scenario. It is also important to
remember that the Commission and parties will have an opportunity to evaluate the state of any City of
Boulder municipalization in the 2019 ERP, which will be filed on or before October 31, 2019.)
325
Hr. Tr. II, at 203:3-6 (Feb. 2, 2017).
326
Hr. Tr. III, at 51:4-8, 52:7-20 (Feb. 3, 2017) (Well, I think full value of storage is a hard-to-define term.
I think our modeling procedure is going to capture 90 to 95 percent easily of the true value of a grid
interconnected storage facility . Now, there's lots of talk about the ability of storage to be used farther
downstream on the distribution system. And when you move storage onto the distribution system, you
can get some beneficial values there that don't exist when they are interconnected on the transmission
system. Those are extremely site-specific. And it's extremely important that the company have the ability
to dictate the charging and discharging of those storage devices on the distribution system if you want to
claim those as customer values. But I think our methodology captures the vast, vast majority of -- I'll call it
true value that's out there for these types of storage devices.)

101
storage valuation methodology sufficiently captures potential value to the Companys

system, including sub-hourly ancillary service value.327 Moreover, storage is not new

to the Company and past experience will help ensure it receives appropriate valuation in

the Phase II bid evaluation process. 328

Public Service therefore reiterates the recommendation regarding the storage

valuation methodology contained in Mr. Scholls rebuttal testimony and reinforces its

desire to receive cost-effective storage bids to evaluate through the Phase II bid

evaluation process.

iv. The SPS Diversity Exchange

In its rebuttal case and in response to a recommendation from OCC, the

Company agreed to bid the SPS Diversity Exchange into the Phase II competitive

solicitation instead of treating it as a generation resource on the loads and resources

table. 329 At hearing, however, WRA through cross-examination raised the issue of

whether a bid involving the SPS Diversity Exchange would be contrary to the

Companys proposal to not accept coal-fired bids in the Phase II competitive

solicitation. 330 WRA appeared to suggest that because the SPS resource mix that is

327
Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 31:18-20 (filed Jan. 30, 2017);
see generally Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 27:1 32:8 (filed
Jan. 30, 2017).
328
Hr. Tr. III, at 52:1-6 (Feb. 3, 2017) (Storage is not new to our company. We have had Cabin Creek on
our system for 50 or 60 years now. We have operated large-scale battery on the NSP system for probably
ten years now -- maybe not quite ten. So storage is not new to us. And so we think we know what the
value is.)
329
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 49:6-8 (filed Jan. 30, 2017); Corrected
Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 13:6-11 (filed Jan. 30, 2017).
330
Direct Testimony of Alice K. Jackson (Hr. Ex. 1), at 33:6-7 (filed May 27, 2016) (As discussed in the
testimony of Mr. Kent Scholl, we do not intend to accept bids from coal-fired generation resources in the
Phase II solicitation); Hr. Tr. III, at 14:14 23:8 (cross-examination of Company witness Mr. Scholl by
WRA counsel regarding the SPS Diversity Exchange).

102
drawn on through the SPS Diversity Exchange includes coal-fired generation, it conflicts

with the Companys proposal.

This hyper-technical construction of the Companys proposal regarding coal-fired

bids in the Phase II competitive solicitation is without merit. The purpose of the SPS

Diversity Exchange is to take advantage of load diversity that exists between the SPS

system and the Public Service system. 331 As explained by Company witness Mr. Scholl

at hearing, in the unlikely event that energy would be called upon as a result of the SPS

Diversity Exchange, it would be during high load periods when the incremental

generation would consistent predominantly of gas-fired generation. 332 At a more

fundamental level, it seems academic to discard a resource that can potentially bring

the benefits of load diversity to our customers because there might be some level of

coal-fired generation in the energy procured over the SPS Diversity Exchange

transmission path. The Companys proposal on coal-fired bids was not intended to

preclude bids of this type. 333 Forcing the SPS Diversity Exchange out of the Phase II

competitive solicitation on this basis will remove a resource that may provide unique

331
[L]oad diversity is the difference between the coincident demand and the non-coincident demands of
two or more electric loads. Load diversity between two power systems may be influenced by differences
in the make-up of customers (e.g., residential, commercial, industrial, and agricultural), by geography,
climate, and time zones. Corrected Revised Rebuttal Testimony of Kent L. Scholl (Hr. Ex. 8), at 13:13-
17 (filed Jan. 30, 2017).
332
Hr. Tr. III, at 56:25 57:13 (Feb. 3, 2017) (hearing testimony of Company witness Mr. Scholl: You
know, if we were going to call on that energy that would be available through the diversity -- I mean, it's
typically going to be during our high load periods. And so that's typically going to be a July summer late
afternoon period. And typically, if we were to call on energy from our sister utility at that time, they are
going to be like our system is, the incremental generation that they would bring on their system in order to
meet our requested energy is going to be gas-fired generation because they are going to be in the, you
know, same summer conditions. And they will have their lowest cost generation already baseloaded. So
they would respond with incremental gas-fired generation); Hr. Tr. III, at 56:17-21 (Feb. 3, 2017) (hearing
testimony of Mr. Scholl that the SPS Diversity Exchange would rarely be called upon to provide energy).
333
Direct Testimony of Kent L. Scholl (Hr. Ex. 5), at 9:3 10:21 (filed May 27, 2016) (explaining that bids
from coal-fired generators will not be accepted due to (1) environmental compliance issues and (2)
issues that coal-fired generators have integrating variable energy resources).

103
benefits to customers from consideration based on an overly expansive interpretation of

the Companys proposal. This argument should be rejected by the Commission and the

SPS Diversity Exchange should be permitted to bid into the Phase II competitive

solicitation, consistent with OCCs recommendation.

v. O&M actuals proceeding

CIEA witness Mr. Monsen offered an alternative proposal if the Commission did

not accept his proposal to convert any utility ownership bid amounts into hard cost caps.

He argued that the Commission should open a phase in this docket or a separate

proceeding to allow the Commission to consider O&M data related to the performance

of PSCos [utility-owned generation] projects relative to expectations. 334

This proposal is devoid of any evidence to suggest that the Company has

purposefully underestimated its O&M costs for utility-owned projects. It is, as Company

witness Ms. Jackson explained, a proceeding or process designed to address a

phantom issue of [Mr. Monsens] own making, specifically that the Company is

underestimating O&M costs to make its bids more competitive as compared to IPP bids,

then exceeding these O&M estimates after a bid is accepted and a project is approved

by the Commission. 335 Staff witness Mr. Camp reached a similar conclusion regarding

the merits of opening such a proceeding. At hearing, in response to a question from

Commission counsel, Mr. Camp explained that he did not think the proceeding

recommended by Mr. Monsen would be productive because it would duplicate

investigations occurring through the existing process relating to the Equivalent

334
Corrected Answer Testimony of William A. Monsen (Hr. Ex. 29), at 23:19-21 (filed Jan. 30, 2017).
335
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 68:14-18 (filed Jan. 30,
2017).

104
Availability Factor Performance Mechanism (EAFPM) metric. 336 Accordingly, the

Commission should reject Mr. Monsens recommendation.

vi. Coal supply reporting

OCC witness Mr. Neil testified that the Company should be required to report

annually on coal supply issues given the recent bankruptcies of major companies in the

coal mining sector, and update its prior coal supply study performed in 2011. 337 This

concern was raised at the public hearing by several participants.

The Company understands how news surrounding the coal industry and the

regulatory difficulties facing it can lead one to the conclusion that coal supply is at risk.

However, Public Service respectfully believes that this concern is overstated for several

reasons. First, major US coal suppliers are beginning to emerge from bankruptcy and

the western US coal operations for these entities, which are the operations that supply

coal to Public Service, are reported to be profitable and have continued to operate

normally during each of the bankruptcies. 338 Moreover, a recent USGS report found

that an estimated 25 billion tons of coal in the Powder River Basin alone are

336
Hr. Tr. III, at 227:1-18 (Feb. 3, 2017) (hearing testimony of Mr. Camp addressing the EAFPM: It is
actually a factor that appears within the ECA now where there is a measurement that is made on how
well the company's units are performing as compared to what nationally a lot of units are. I should not say
that. We looked at past history of the company and kind of set a baseline and expect them to operate
within that. There is some penalties or bonuses that the company can achieve. I don't remember whether
the -- I don't think the ALJ that is assigned to that has closed that yet, but Staff had intervened and then
withdrawn our intervention after doing a fairly detailed investigation into performance issues at a number
of the plants out there. So we were satisfied, and I would expect that you may be seeing or the
Commission may be seeing a recommended decision from the ALJ sometime in the next month or two to
actually close that proceeding.) In response to another question from Commission counsel regarding
whether an investigation would be productive, Mr. Camp responded: Productive, actually, I am saying
the opposite. I think that we looked into that already. Hr. Tr. III, at 227:23-24 (Feb. 3, 2017).
337
Corrected Answer Testimony of Chris Neil (Hr. Ex. 19), at 48:11-15 (filed Jan. 30, 2017).
338
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 96:19-21 (filed Jan. 30,
2017).

105
recoverable at current market prices. 339 Second, only railroad issues have caused

supply issues over the past few years and the Company has not experienced any

supply disruptions tied to bankruptcies or mining issues. 340 And finally, as a mitigation

measure, the Company qualifies multiple coal supply sources for each coal-fired

generation resource. 341 This protects the Company and customers such that, if a

disruption occurs at a particular mine, coal can easily be sourced from one of the other

qualified sources. In other words, there is a contingency plan in place at each coal-fired

facility from a fuel supply standpoint.

IV. NEXT STEPS AND CONCLUSION

A. Future Rulemaking

Moving towards the 2019 ERP, the Company remains amenable and believes it

would be productive to discuss a potential rulemaking to better integrate the ERP Rules

and the RES Rules. 342 As discussed in the Companys rebuttal case and at hearing, it

may be appropriate to take a fresh look at the ERP Rules and RES Rules to identify any

(1) inconsistencies as between the requirements of the two sets of rules, and (2)

339
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 97:19-20 (filed Jan. 30, 2017)
citing James A. Luppes, et al., U.S. Geological Survey, Coal Geology and Assessment of Coal Resources
and Reserves in the Powder River Basin, Wyoming and Montana, at 1 (2015), available at
https://pubs.usgs.gov/pp/1809/pdf/pp1809.pdf (A total of 162 billion short tons of recoverable coal
resources (coal reserve base) are estimated at a 10:1 stripping ratio or less. An estimated 25 billion short
which are resources that can be economically produced at or below the current sales price at the time of
the evaluation.))
340
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 97:3-4 (filed Jan. 30, 2017)
([I]n recent years (e.g., 2011-2015), the major coal supply issues for Public Service plants were related
to railroad performance issues in 2014. Although on-site coal inventory levels dropped below optimal
levels, none of the Public Service plants ran out of coal during this period, no replacement coal was
purchased, and Public Service incurred no replacement power costs.)
341
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 97:10-13 (filed Jan. 30,
2017).
342
Corrected Revised Rebuttal Testimony of Alice K. Jackson (Hr. Ex. 2), at 49:8-12 (filed Jan. 30, 2017)
([T]he Company would support the opening of a rulemaking proceeding to address the inconsistencies
and lack of clarity as between certain RES Rules and the ERP Rules, as detailed in our waiver motion in
Proceeding No. 16A-0117E included as Attachment AKJ-6. We would like to see these inconsistencies
addressed to prevent further uncertainty going forward.)

106
streamlining that can be achieved prior to commencement of the next ERP cycle. 343 To

be sure, the fundamental purposes and components of the ERP Rules and RES Rules

should not change; instead, the effort would be directed at integration to ensure the

ERP Rules and RES Rules are complementary of one another and not duplicative or in

conflict. 344 The Company does not believe any formal action needs to be taken by the

Commission on this front through this proceeding, but in terms of looking forward,

having a discussion around the potential for a rulemaking may be an appropriate next

step.

B. Summary of Recommendations

In conclusion, the Company respectfully requests that its 2016 ERP be approved

and that the Commission adopt recommendations consistent with this SoP. 345 This

includes requests for findings:

Approving the Companys 2016 ERP as modified in this proceeding;

Approving the proposed low, medium, and high resource need approach and

associated updating process;

Approving the 8-year RAP and 39-year Planning Period;

343
Hr. Tr. I, at 162:24 163:9 (Feb. 1, 2017) (hearing testimony of Company witness Ms. Jackson: The
rulemaking we have contemplated is really pulling and taking a look at the RES statute that we have
[and] the directives of the ERP, and making sure that we are entirely consistent in our rules between the
two. I had mentioned earlier, in my testimony, that there have been changes, through time, to the RES
statute, which have been promulgated through the rules, but we haven't necessarily gone back and gone,
okay, now, does everything match up nicely between the ERP rules, and the RES rules.)
344
Hr. Tr. I, at 97:23 100:6 (Feb. 1, 2017) (exchange between Interwest counsel and Company witness
Ms. Jackson, with Ms. Jackson discussing the appropriate scope of any rulemaking); Hr. Tr. II, at 72:22
73:11 (Feb. 2, 2017) (exchange between Commissioner Koncilja and Company witness Ms. Jackson
regarding the scope and potential subjects of any rulemaking); Hr. Tr. IV, at 165:21 166:8 (Feb. 6, 2017)
(comments of Chairman Ackermann at the close of hearing regarding the scope of a future rulemaking).
345
Attachment A to this SoP contains an Executive Summary of the Companys proposed
recommendations in this proceeding.

107
Rejecting CIEAs proposal that capital and O&M cost estimates for utility

ownership bids in the Phase II competitive solicitation convert into hard cost

caps for cost recovery purposes;

Approving the Companys proposed book lives for gas, wind and solar bids that

would result in utility ownership;

Approving the RFPs and model contracts filed as part of the 2016 ERP;

Approving the Companys proposed approach to implementation of the annuity

method for use in the Phase II competitive solicitation;

Approving the Companys proposed approach to use the GPVM Adder in the

base case and isolate its impact on bid portfolios in the 120-Day Report;

Approving the Companys proposed use of low and high carbon proxy price

sensitivities with a $0/ton carbon price in the base case;

Rejecting WRAs request for a sensitivity case based upon the federal SCC;

Approving the use of the four-source blend natural gas price forecast and the

Companys proposed low and high gas price sensitivities;

Rejecting OCCs request for use of a NYMEX-only natural gas price forecast;

Rejecting CIEAs proposal to procure excess resources to potentially replace

25% of the Companys coal-fired generation that is unilaterally deemed at-risk;

Rejecting CIEAs request to conduct Strategist modeling that assumes early

retirements of coal-fired generation not proposed by the Company or mandated

by the General Assembly;

Approving the use of the Companys weighted average cost of capital of 6.78%

as the discount rate;

108
Approving the use of a surplus capacity credit of up to 100 MW at a credit of

$2.79/kW-mo for four months of each year within the RAP (2016-2023) and 12

months of each year beyond the RAP (2024-2054) provided for at the cost of a

generic combustion turbine;

Approving all studies filed for approval in this proceeding, including the Expanded

Flex Reserve study;

Approving the expansion of the Flex Reserve study to 4.5 GW, as well as

expansion of the wind integration study, coal cycling/wind curtailment study, and

wind ELCC study to a 4.5 GW level, to be filed in this proceeding in advance of

commencing the Phase II competitive solicitation;

Approving the use of statewide economic indicators for sales and peak demand

forecasting purposes;

Authorizing the Company to bid the SPS Diversity Exchange into the Phase II

competitive solicitation;

Rejecting CIEAs request to open a separate proceeding or new phase in this

proceeding to investigate actual O&M costs as compared to estimated O&M

costs for utility-owned generation resources; and

Rejecting OCCs request that the Commission require the Company to file annual

reports regarding coal supply issues.

DATED this 24th day of February, 2017.

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Respectfully submitted,

By: /s/ Christopher M. Irby


William M. Dudley, #26735
Assistant General Counsel - Lead
Christopher M. Irby, #35778
Assistant General Counsel
Xcel Energy Services Inc.
1800 Larimer Street, Suite 1100
Denver, Colorado 80202-1414
Telephone:
Dudley: (303) 294-2842
Irby: (303) 294-2504
Fax: (303) 294-2988
Email:
Dudley: bill.dudley@xcelenergy.com
Irby: christopher.m.irby@xcelenergy.com

and

Gregory E. Sopkin, #20997


Matthew S. Larson, #41305
Caitlin M. Shields, #41539
Wilkinson Barker Knauer LLP
1755 Blake Street, Suite 470
Denver, Colorado 80202-3160
Telephone: (303) 626-2350
Fax: (303) 626-2351
E-mail: gsopkin@wbklaw.com
mlarson@wbklaw.com
cshields@wbklaw.com

ATTORNEYS FOR PUBLIC SERVICE


COMPANY OF COLORADO

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CERTIFICATE OF SERVICE

I hereby certify that on February 24, 2017 the foregoing document was served on those
parties shown on the Commissions Certificate of Service accompanying such filing.

By: /s/ Margo A. Parker

111