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STAFF’S COMMENTS

ON PSCO’S 2018
120-DAY REPORT
Colorado PUC E-Filings System

Public Service
Proceeding No. 16A-0396E Company of Colorado
2016 Electric
Resource Plan

July 23, 2018

Notice of Confidentiality
A portion of the document has been filed under seal:
Pages: 4, 10, 11, 32, 48, Appendix A pages A2 and A4
Highly Confidential information is designated by blue shading

PUBLIC VERSION
Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
Public Version

Table of Contents

I. INTRODUCTION ............................................................................................................................... 1
II. EXECUTIVE SUMMARY OF STAFF’S ASSESSMENT OF THE 120-DAY REPORT ............... 1
III. GENERAL OVERVIEW .................................................................................................................... 6
A. The ERP Evaluation Process .......................................................................................................... 6

B. Resource Need and Solicitation Response...................................................................................... 8

C. Observations from the 0 MW Need Scenario ................................................................................. 9

D. PSCo’s Preferred Portfolios .......................................................................................................... 12

E. CEPP Savings ............................................................................................................................... 14

1. Savings Over Time ..................................................................................................................... 14


2. Comparison of Portfolio Energy and Capacity .......................................................................... 17
3. Major Cost Categories ................................................................................................................ 19
F. Impact on Ratepayers .................................................................................................................... 20

IV. MODELING AND EVALUATION CONCERNS ........................................................................... 22


A. Baseline for Comparison............................................................................................................... 22

B. Financial Evaluation Concerns ..................................................................................................... 24

1. Discount Rate ............................................................................................................................. 24


2. Owned Resource Financing Assumptions.................................................................................. 25
3. Revenue Requirement for Comanche 1 and 2 ............................................................................ 26
C. Production Tax Credits ................................................................................................................. 27

1. Understanding the Company’s ability to use PTCs ................................................................... 27


2. Financial Impact of Production Tax Credits .............................................................................. 28
3. Options for the Financial Treatment of PTCs ............................................................................ 30
D. Comparison of Portfolios with Different “Tails”.......................................................................... 33

1. 190 MW Replacement CT in 2026 ............................................................................................ 33


2. Modeling of Generic CTs ........................................................................................................... 34
3. 700 MW Combined Cycle in 2026 ............................................................................................ 36
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4. 4B Sensitivity Analysis Results ................................................................................................. 37


E. Storage .......................................................................................................................................... 38

F. Summary of Issues ........................................................................................................................ 38

V. OTHER FACTORS FOR THE COMMISSION TO CONSIDER ................................................... 40


A. Alternative vs. Preferred CEPP..................................................................................................... 40

B. Review of Proposed Gas Ownership ............................................................................................ 42

C. Other Economic Benefits .............................................................................................................. 44

D. Effective Load Carrying Capacity (“ELCC”) ............................................................................... 46

1. Wind and Solar Credit Determination........................................................................................ 46


2. Storage ELCC Credit Determination ......................................................................................... 46
E. EVRAZ Contract .......................................................................................................................... 47

VI. ON-GOING STUDIES AND REPORTING .................................................................................... 48

Appendix A Attached

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List of Tables and Figures

Table 1: Loads and Resources Bottom Line ............................................................................................... 8


Table 2: Average Dispatch Cost by Capacity Factor ................................................................................ 12
Table 3: Public Service’s Preferred ERP Portfolio ................................................................................... 13
Table 4: Public Service’s Preferred CEPP ................................................................................................ 13
Table 5: Portfolio NPVRR Revenue Requirements.................................................................................. 25
Table 6: Comparison of the DTA Impact on CEP Portfolios ................................................................... 29
Table 7: Estimated PTC Impact For Different Treatment Options........................................................... 32
Table 8: Summary of Staff's Concerns ..................................................................................................... 39
Table 9: Summary of Federal ITC Guidelines for Solar Energy Projects ................................................ 42

Figure 1: Mix of Energy Displaced by 789 MW of Wind Additions ....................................................... 10


Figure 2: Costs and Savings From Least Cost 0 MW Need ERP Portfolio.............................................. 11
Figure 3: Total Strategist System Revenue Requirements (Nominal) ...................................................... 15
Figure 4: Preferred ERP Minus Preferred CEPP Costs Over Time .......................................................... 16
Figure 5: Real Preferred CEPP Minus Preferred ERP Costs .................................................................... 17
Figure 6: System Capacity Difference ...................................................................................................... 18
Figure 7: System Energy Differences ....................................................................................................... 19
Figure 8: Summary of Major Cost Differences ........................................................................................ 20
Figure 9: Approximate Total Cost Impact of Preferred CEPP vs. Preferred ERP ................................... 21

Appendix A Figures

Figure A1: Coal Fixed Operations and Maintenance (O&M) Savings................................................... A-1
Figure A2: Capital Revenue Requirements ............................................................................................ A-2
Figure A3: Thermal Generation/Market Purchases ................................................................................ A-3
Figure A4: Renewable Energy Costs ...................................................................................................... A-4
Figure A5: Gas Resources Fixed Costs and Portfolio Surplus Capacity Credit ..................................... A-5

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Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
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I. INTRODUCTION

This document contains Staff’s comments pertaining to the Public Service Company of Colorado
(PSCo or the “Company”) 120-Day Bid Evaluation Report (120-Day Report) filed June 6, 2018, as part
of Phase II of the Company’s 2016 Electric Resource Plan (ERP).

In its Report, PSCo provided an analysis of the 2017 all-source solicitation results and proposed
two “preferred” portfolios of resources and an alternative preferred portfolio. The Company’s “Preferred
ERP” portfolio is designed to meet the 454 MW capacity shortfall that begins in 2023, the 8th year of
the Resource Acquisition Period (RAP). The Company’s Preferred Colorado Energy Plan Portfolio
(“Preferred CEPP”) and “Alternative CEPP” are designed to meet the same load forecast as the
“Preferred ERP” but also account for the capacity and energy needs resulting from retirement of the 325
MW Comanche 1 and 335 MW Comanche 2 units in years 2022 and 2025 respectively. 1

The Independent Evaluator (IE) submitted its report on the Company’s 120-Day Report on July
16, 2018.

II. EXECUTIVE SUMMARY OF STAFF’S ASSESSMENT OF THE 120-DAY


REPORT

The purpose of this Phase II proceeding is to review and evaluate the results of PSCo’s 2017 All-
Source solicitation and for the Commission to approve a specific resource plan for the acquisition of
cost-effective resources. This ERP and the associated 120-day Report are unique and more complex than
usual since the Company is presenting two preferred portfolios for comparison, each of which provides a
very different path forward and requires a unique set of assumptions. The Company is advocating for its
Preferred CEPP in favor of its Preferred ERP for a number of reasons, but most importantly because the
Company projects that it will save ratepayers $213 Million on a NPV basis over the 39 year Planning
Period (2016 to 2054) as compared to the Preferred ERP. This comparison has proven more challenging
than Staff expected. The decision to evaluate vastly different futures (one where coal-fired resources are
replaced with renewable resources in the short term and another where coal-fired generation is replaced

1
Comanche 1 and 2 are proposed to retire at the end of 2022 and 2025 respectively, creating capacity needs in 2023 and
2026.
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with gas-fired generation in the medium term) leaves the Commission in a position where it must
compare two NPV calculations that are essentially apples and oranges. In addition. it has become
increasingly apparent that the Strategist Model is not well suited for the evaluation of some of the new
technology offerings being considered here such as storage.

The Commission is well aware of the limitations of modeling and the vulnerabilities of relying
on long-term forecasts and assumptions. In the traditional ERP setting, when you are comparing and
selecting from a pool of resources to fill the same future need (e.g., 450 MW or 0 MW), these
vulnerabilities are far less pronounced than in the case, as here, when you are attempting to compare two
very different futures. Both the Company and the IE have cited unexpected complexity as the basis for
extension requests, and the Commission should be cognizant of this complexity and the limited time
afforded to parties for review and comment. Staff will discuss a number of concerns with the modeling
below and discuss why Staff disagrees with the Company that $213 Million NPV is a “conservative”
estimate of savings. Unfortunately, Staff is hard-pressed to reach any solid conclusions from the
modeling results, but when viewed in the appropriate light, the modeling still provides a vast amount of
information. While the modeling results are a critical element of any resource acquisition decision, there
are many other public interest considerations that the Commission should also consider.

From the beginning, Staff has approached the CEPP proposal with an open mind and a healthy
dose of skepticism. Staff believed that a legitimate opportunity had presented itself with the Company’s
willingness to voluntarily retire Comanche 1 and 2 early and solicit replacement resources within the
ERP proceeding and as part of the pending competitive solicitation.2 This was in part responsive to
Governor Hickenlooper’s Executive Order, which is not binding on the Commission, but is never-the-
less appropriately considered. Coupled with the diminished availability of PTCs in the future and what
appeared to be a declining cost environment, Staff agreed to support the presentation of a CEPP in the
120-day Report. 3 This agreement was predicated on two critical elements captured in the Stipulation: 1)
the Company would only propose a CEPP if it could demonstrate that it would not increase costs to
ratepayers as compared to the “business-as-usual” case; and 2) Staff would be free to take any position

2
This was consistent with the Commission’s stated preference that resource acquisition decisions be made within an ERP
proceeding and through a competitive solicitation.
3
The Company’s competitive solicitation did not disappoint and validates the Stipulating Parties and the Commission’s
support for a CEPP proposal in the 120-day Report.
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on the CEPP and the topic of Company ownership, the only limitation being that Staff would not use the
Company’s voluntary presentation of the CEPP to argue for imposition of an alternative retirement plan.

The Company accepted a very high burden when it agreed to demonstrate no increase in costs.
Staff was both skeptical and hopeful of its ability to meet this burden, but knew the proof would be in
the pudding. Staff also recognized that this would be a different type of evaluation and that the modeling
would be as critical as ever and it was essential that the model was unbiased and able to produce
credible results. Staff intended and expected that the modeling would be carefully scrutinized and the
Company’s claims would be appropriately tested. Admittedly, the Stipulation did not adequately address
the best way to do so. To its credit, the Commission and its advisors quickly took action and developed a
detailed and well thought out process for addressing the threshold question of whether to consider a
CEPP in Phase II and for obtaining the assortment of information needed to make an informed decision.
But for some unexpected delays, the Commission’s plan has generally worked as intended and it has
before it an extensive amount of information upon which to base its decision.

Staff has reviewed the 120-day report and offers the following observations, each of which will
be discussed in more detail below:

1. Based on its baseline modeling, the Company projects the Preferred CEPP will produce $213
Million in NPV savings as compared to the Preferred ERP over the planning period. Staff
believes this amount is likely overstated and Staff is unable to conclude that the Preferred CEPP
is more likely than not to produce savings. The modeling results presented by the Company
contain a number of errors and a fundamental flaw, which are discussed below, that render the
results suspect. Thus, Staff cannot draw any definitive quantitative conclusions regarding the
potential for savings from the modeling results, which makes the qualitative aspects of a decision
more prominent. From a purely economic standpoint, Staff concludes that the Preferred CEPP,
Alternative CEPP and the least-cost ERP are all viable options for Commission consideration. 4

2. Company ownership comes at a cost premium and with added risk. Recognizing this, the
Company chose to pursue lesser Company ownership of eligible energy resources than it
originally targeted. The Company has provided its estimate of the cost premium associated with

4
The Company has provided no support for its selection of the Preferred ERP over the LCP ERP, which along with costing
less, has a higher level of renewable investment. Section IV.A below provides a discussion of these two portfolio options.
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Company ownership of wind in the Preferred CEPP, which is largely related to Production Tax
Credit (PTC) utilization and resulting Deferred Tax Asset (DTA) costs. If the Commission
accepts these Company estimates for purpose of its decision making, it should have steps in
place to mitigate or insulate ratepayers from the risk associated with these estimated costs.

3. While the Preferred CEPP may produce NPV savings from the Company’s perspective, it is
important to acknowledge and consider that most of these savings occur after 2034 and in the
early years the CEPP will likely increase revenue requirements for PSCo and presumably result
in increased rates.

4. A critical component of the CEPP and its cost effectiveness is the reduction in the RESA to
offset the increased costs of accelerated depreciation. While the details of this are being
discussed in the AD/RR proceeding, this is a critical policy call for the Commission. Staff has
not fully evaluated the scenario of pursuing the CEPP without the RESA reduction, but finds it
unlikely that the no increase in costs threshold can be met without this offsetting reduction.

5. There are a number of sensitivity runs that provide varying views of the future under the CEPP
and the Commission can give those the weight they deserve. The CEPP provides a number of
other benefits, including but not limited to environmental and economic development benefits,
that add value to the CEPP and should be considered by the Commission.

6. If the CEPP is approved, the Company stands to significantly benefit financially by both fully
recovering the remaining rate base cost associated with Comanche 1 and 2 and adding rate base
that is expected to produce approximately Million NPV earnings over the planning period.
The Company is foregoing earning on the remainder of the Comanche 1 and 2 rate base
amounting to approximately leaving them with a net positive earnings impact of
million.5 This is relevant for a number of reasons, including a discussion of allocation of risk
associated with Company ownership and the carrying cost (return) on regulatory and deferred tax
assets.

5
The remaining earnings associated with Comanche 1 and 2 are the subject of the separate but related Proceeding 17A-
0797E. The numbers references here are based on those presented by the Company in Revised Attachment MAM-1 in that
Proceeding and may not be the final values.
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7. The modeling framework implemented here is no longer suited to the kinds of resource questions
being asked and the current generation market. The Company’s reliance on Strategist modeling
was appropriate in past ERPs where the Company identified 1,000s of MWs of capacity
resources needed within the RAP period. However, this modeling construct may be ill suited to a
future where resource acquisition is focused on resources providing mostly energy and
potentially little capacity. Future modeling constructs should be suited to evaluate new or
innovative technologies such as storage which may be offered in configurations yet to be fully
understood or modeled and may need to be capable of reflecting resource retirement options in
different time periods.

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III. GENERAL OVERVIEW

A. The ERP Evaluation Process

As should be apparent from the relevant narratives in the Company’s 120-Day Report, the bid
modeling process used in this ERP proceeding was significantly more complex than the analogous
process from prior resource plan proceedings. This is due to the combination of the size and scope of the
bid pool and the complication of evaluating differing levels of resource need. There are three main
factors contributing to the significantly higher complexity of modeling and evaluation in this instance.

The largest source of complexity comes in the process of modeling both the traditional ERP need
and the CEPP resource need. The ERP need is driven by load growth and the planned retirement of
generating units and expiration of PPAs during the RAP period. Normally, the ERP simply compares
varying resource portfolios within the RAP period against a constant view of the long-term future (i.e., a
fixed “tail”). A constant view of the future, even if wrong, tends to have relatively less effect on the
difference in costs of the various portfolios since the future is the same. In contrast, a CEPP that fills the
resource needs for Comanche 1 during the RAP and Comanche 2 beyond the RAP changes both the
amount and timing of resource acquisition. This difference in the timing of resource acquisition results
in the development of two distinct portfolio “tails” or differing views of the long-term future of the
PSCo generating system, resulting in cost comparisons that are less meaningful or determinative.

The size and scope of the pool of bids received from this All-Source Solicitation also contributed
to the level of analytical complexity involved in this process. The number of economically competitive
bids advanced to modeling literally produced millions of possible resource portfolios to filter and
evaluate. In addition, economically competitive, large-scale solar plus storage bids present another new
element to the Phase II evaluation. Modeling the operation of storage facilities and their economic value
added further complexity to ERP and CEPP evaluations.

Lastly, the inclusion of Company-owned wind introduced another new issue to the modeling and
evaluation. The Company has acknowledged it will be unable to use all Production Tax Credits (PTCs)
as they are generated by the proposed project, creating either a delay in ratepayer benefits from the PTC
or the creation of a Deferred Tax Asset (DTA) on which the Company has proposed to earn a return.
This is an extremely complicated financial issue with significant impact to the projected portfolio

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savings. While PTCs were part of the evaluation of the Rush Creek wind project, the expectation was
that those PTCs could be used to offset tax liabilities as they were generated. Said another way, PSCo
expected to be fully tax efficient in its use of Rush Creek PTCs. Each incremental PTC eligible resource
added to the system, as well as other factors that impact the Company’s tax situation such as the recent
change in the corporate tax rate, have the potential to put PSCo in a tax inefficient situation creating
implications for overall project costs.

The Company instituted new modeling approaches to handle these complexities, some of which
were created in real time and not necessarily well documented. Staff made every effort to review the
bids, the bid selection process, the screening process to enable Strategist modeling, the Strategist
modeling itself, the post-Strategist portfolio adjustments, the calculation of the PTC/DTA impacts and
the resulting final portfolio outputs. In addition, Staff remains cognizant of the separate but related
Accelerated Depreciation/RESA Reduction proceeding (17A-0797E) and its potential impacts on the
costs of the proposed CEPP. Staff would like to acknowledge that, due to these complexities, the
Company provided an unprecedented amount of information including Strategist model outputs, input
files, and back-up information as well as responding to Staff’s questions with phone calls, meetings, and
written explanations.

Given the limited time for review in this expedited proceeding, Staff’s comments will focus
primarily on providing some insights into the modeling results 6 and financial evaluation to help the
Commission understand the merits of approving the Company’s Preferred CEPP. Staff has a number of
serious concerns that the modeling and financial evaluation overstate the financial benefits or savings to
ratepayers of the Preferred CEPP. At the very least, the Commission should be aware of the uncertainty
and timing of the estimated benefits of the CEPP. The cumulative CEPP benefits, as presented by PSCo
in the 120-Day Report, are not positive for ratepayers until 2037. 7

6
Staff has also focused on the base modeling and base model assumptions, which are the most relevant if the Commission is
considering a pure quantitative view of costs and savings. The sensitivity runs are useful, but in Staff’s view, each have an
implicit qualitative aspect to their consideration.
7
The Preferred CEPP is projected to cost ratepayers more than the Preferred ERP portfolio over the short-term and the
cumulative difference between the portfolios does not show a benefit to ratepayers until 2036.
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B. Resource Need and Solicitation Response

Table 1 summarizes the Company’s need under the various scenarios evaluated here. The ERP
scenario reflects a system need of 454 MW starting in 2023, the last year of the RAP. The CEPP
scenario including the Retirement of both Comanche units 1 and 2 shows a need of 779 MW in 2023
and 1,114 in 2026, three years after the end of the RAP. Additional post-RAP need due to load growth
or other resource retirements are not included here because that need would be met through a subsequent
ERP.

TABLE 1: LOADS AND RESOURCES BOTTOM LINE


RAP Period Post-RAP Period
PSCo System (MW) 2019 2020 2021 2022 2023 2024 2025 2026
ERP Resource Position
206 326 294 11 (454)
Excess / (Need)
Comanche 1 Retirement (325) (325) (325) (325)
CEPP RAP (Need) 0 0 0 0 (779)
Comanche 2 Retirement (335)
CEPP Full Replacement
0 0 0 0 (779) (779) (779) (1,114)
(Need)
Note: PSCo proposes to retire Comanche 1 at the end of 2022, creating a 325 MW resource need
starting in 2023. Similarly, Comanche 2 would retire at the end of 2024, creating a 335 MW resource
need starting in 2026.

On August 30, 2017, Public Service issued its 2017 All-Source Solicitation with a bid due date
of November 28, 2017. The Company requested proposals for Company Ownership, Dispatchable,
Semi-Dispatchable and Renewable Resources. In those solicitations, Public Service indicated a need
ranging from 0 MW of capacity to over 1,110 MW in 2023, the last year of the Resource Acquisition
Period (RAP). Bidders were subsequently provided the opportunity to refresh their bids on or before
February 5, 2018 as a result of the change in tax law as well as the decision of President Trump to
impose tariffs on solar panels imported into the United States.

The downward trend in the pricing of renewables, in combination with the extension of Federal
subsidies, has resulted in a very competitive market for both renewable resources and storage. PSCo
received over 400 bids representing more than 230 distinct projects, and of these 160 bids passed
PSCo’s “Bidder Eligibility Screening” and were passed through to modeling. Section 6.0 of the

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Company’s 120-Day Report and the accompanying Highly Confidential Appendix H provide more
detail on the bid process and range of bids received.

The Independent Evaluator has access to knowledge and understanding of other utility energy
resource plan acquisition processes, with experience in the unique nuances of this evolving market from
bidders, soliciting utilities and Public Utility Commission perspectives. The IE provides independent,
third party analysis and evaluation that assure acquisition transparency and facilitates Commission
decisions based on reasonable interpretation of Commission acquisition directives and helps verify that
utilities have complied and are offering adequate opportunities for independent power producers.

C. Observations from the 0 MW Need Scenario

In Decision No. C17-0316 (the Phase I decision), the Commission required the Company to
include in its Phase II report the modeling results reflecting an assumption of no capacity need during
the RAP (i.e., a 0 MW need). 8 This modeling shows that, in today’s market, energy from renewable
resources can economically displace fossil fuel generation. This is evidenced by the fact that the 0 MW
need scenario selects 789 MW of wind without any need for capacity. 9

As the Company points out, this portfolio is not a viable choice because it does not fill the actual
capacity shortfall of 454 MW in 2023. However, it does provide a useful analysis of how adding very
low cost wind impacts the current and assumed future PSCo system (i.e., the baseline tail). Staff
compared the Strategist Output file for this least cost 0 MW Need ERP portfolio to the baseline file to
determine these impacts. As shown in Figure 1, in the early years the added wind displaces energy
primarily from existing gas CCs and coal. As the assumed system becomes more and more dominated
by generic CTs in the latter years, the displaced energy switches to a combination of mostly CT and
some CC generation displacement.

8
Unlike a typical sensitivity, this scenario was run as a fully optimized case and reflected no capacity need through the RAP
period.
9
The Company modeled this scenario by using a zero-cost 454 MW filler in Strategist and allowing the model to select bids
to determine the least cost portfolio when no capacity is needed during the RAP. The resulting portfolio consists of three
wind bids comprising 789 MW of wind.
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FIGURE 1: MIX OF ENERGY DISPLACED BY 789 MW OF WIND ADDITIONS

The portfolio shows million of cost savings (on a net present value basis) from adding 789
MW of wind with no other changes assumed. The fuel and operating cost savings from resources that
are displaced, in combination with the surplus capacity credit (for the 79 MW of net dependable
capacity provided by the 789 MW of wind), outweigh the combined costs of the wind PPAs, the
transmission upgrades/interconnection costs and the additional wind integration costs. The costs and
savings are illustrated in Figure 2.

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FIGURE 2: COSTS AND SAVINGS FROM LEAST COST 0 MW NEED ERP PORTFOLIO

When examining the two figures above, it is evident that the most significant savings occur in
the second half of the planning period when primarily gas generation (and a majority of it from gas CTs)
is being displaced. This illustrates that the inexpensive wind offered by bids is significantly cheaper than
the operating costs for the gas resources available in the ERP system tail. Staff observes that this
supports its contention that using only gas resources to optimize the baseline produces an unrealistic
portrayal of the Company’s future system. It also suggests that some of these modeled savings are not
likely to materialize.

It should also be noted that, as more and more low cost renewable resources displace coal as an
energy resource, it becomes very difficult for coal to compete due to the high fixed costs associated with
coal plant operations and maintenance. For instance, Table 2 compares the economics of Comanche 1
and 2 versus illustrative gas CC and CT units in year 2026 as capacity factor declines. 10

10
The projected O&M costs for Comanche 1 and 2 in 2026 is $35.8 Million on a nominal basis. Average projected fuel costs
for the same period is $17.0/MWh on a nominal basis. Capital expenditures and heat rate degradation are not reflected in
these numbers and would make it even more difficult for coal to compete.
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TABLE 2: AVERAGE DISPATCH COST BY CAPACITY FACTOR


Capacity Factor 80% 65% 50% 35% 20%
Comanche Annual FOM = $35.5M
FOM Costs per MWh ($/MWh) 7.7 9.5 12.4 17.7 31.0
Approximate Total Dispatch Cost ($/MWh) 24.7 26.5 29.4 34.7 47.9
Approximate CC Dispatch Cost ($/MWh) 27.1 27.4 27.8 28.6 30.5
Approximate CT Dispatch Cost ($/MWh) 42.1 42.2 42.4 42.7 43.4
Notes: These values are illustrative and do not include potential increases to both heat rate and
operating costs when units are operated at low capacity factor.

For now, gas remains an important component of resource acquisition necessitated by increasing
amounts of renewable generation and the flex reserves gas capacity provides. In the short term, the use
of gas is expected to continue at approximately historical levels until the Company gains sufficient
operational experience with storage and storage pricing becomes economically competitive. 11

D. PSCo’s Preferred Portfolios

This section is intended to provide context behind PSCo’s presentation of its preferred portfolios
and the potential savings associated with the CEPP. Public Service is proposing to add the resources
shown in Table 3 for the Preferred ERP portfolio and the resources shown in Table 4 for the Preferred
CEPP. The Preferred ERP portfolio reflects the addition of over 1,100 MW of renewable capacity as
well as 50 MW of storage and 301 MW of gas generation. The last row of Table 3 shows that the
Preferred ERP portfolio results in 100 MW of surplus capacity in 2023.

11
Bids for storage presented in the Company’s 120-Day Report p. 41, are tied to solar projects and therefore qualify for an
ITC.
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TABLE 3: PUBLIC SERVICE’S PREFERRED ERP PORTFOLIO


Portfolio Additions County 2019 2020 2021 2022 2023
Revised Resource Surplus (Need) (454)
Gas G215 (Own) Morgan 301 301
Kit Carson/
W602 (IPP) 499 499 499
Cheyenne
Wind
W090 (IPP) Weld 169 169 169
W302 (IPP) Baca 121 121 121 121 121
Solar S085 (IPP) Park 72
Solar+Storage X672 (IPP) Pueblo 250/125
Total Net Dependable Capacity (MW) 23 23 79 341 554
Net Resource Surplus (Need) 100
Note: Values shown for bids are nameplate capacity (MW) and for other rows are net dependable capacity.

TABLE 4: PUBLIC SERVICE’S PREFERRED CEPP


Portfolio Additions County 2019 2020 2021 2022 2023 2024 2025 2026
Revised Resource Surplus (Need) (779) (779) (779) (1,114)
G215 (Own) Morgan 301 301 301 301 301
Gas
G065 (Own) Boulder 82 82 82 82 82
W192 Kit Carson/
500 500 500 500 500 500
(Owned) Cheyenne
Kit Carson/
Wind W602 (IPP) 300 300 300 300 300 300
Cheyenne
W090 (IPP) Weld 169 169 169 169 169 169
W301 (IPP) Baca 162 162 162 162 162 162 162 162
S085 (IPP) Park 72 72 72 72
Solar
S430 (IPP) Pueblo 75 75 75 75
250/ 250/ 250/
X645 (IPP) Pueblo 250/ 50
50 50 50
Solar / 200/ 200/ 200/ 200/
X647 (IPP) Pueblo
Storage 100 100 100 100
110/ 110/ 110/
X427 (IPP) Adams 110/ 50
50 50 50
Net Dependable Capacity (MW) 30 30 98 442 993 993 993 993
Net Resource Surplus 213 213 213 (121)
(Need)
Projects highlighted in green are additions or changes from the “Preferred ERP” portfolio. Values shown are nameplate
capacity (MW).

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The last row of Table 4 shows that the proposed CEPP results in a 121 MW capacity need in
years 2026. The model is not constrained to fill this need with bid resources during the RAP because the
need occurs when Comanche 2 retires outside of the RAP. This need is filled with a replacement CT in
the Strategist model and in reality this need would be filled during a subsequent ERP process.

E. CEPP Savings

PSCo has estimated that the Preferred CEPP delivers $213 million of savings to ratepayers on a
net present value of revenue requirements (NPVRR) basis over the 2016 to 2054 modeling period
compared to the Preferred ERP portfolio. While Staff agrees that NPVRR is an important metric to look
at in order to evaluate potential ERP portfolios, it is not the only metric. The Commission has expressed
interest in year-to-year cost or savings estimates and has cited to such analyses in most if not all of its
recent decisions considering resource acquisitions. This section is intended to “unpack” the projected
$213 million in projected savings in order to understand the profile of savings over time as well as the
drivers of those savings.

1. Savings Over Time

Figure 3 shows the projected Strategist system revenue requirement of the two “preferred”
portfolios over the evaluation period. 12 Note that the overall revenue requirement increases over time for
both portfolios. It is important to remember that PSCo's rates, and subsequent bills, do not necessarily go
down under the Preferred ERP, Preferred CEPP or any other portfolio. These portfolios need to be
evaluated in comparison to each other in terms of their cost and other system benefits such as the
environmental and economic attributes that they deliver.

12
Note that Strategist Revenue Requirements includes only electric generation costs including fuel and incremental
transmission investments; it does not include any other utility costs of service such as ongoing recovery of transmission and
distribution costs, administrative and overhead costs, taxes unrelated to generation, metering, etc. The current ongoing overall
cost of service for the Company is on the order of $3 billion per year.
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FIGURE 3: TOTAL STRATEGIST SYSTEM REVENUE REQUIREMENTS (NOMINAL)

Figure 4 shows the difference in revenue requirement between the two “Preferred” portfolios
over the planning period. While it may be difficult to see from the figure, the cost difference varies
substantially over time from an estimated high of $70 Million in 2033 to a low of -$120 Million in 2045
on a nominal basis. 13 The two plans result in similar costs to ratepayers during the 2018 to 2030 time
period, followed by a three year period when the CEPP costs are higher and then a long period when
CEPP costs are substantially lower. The NPV of this stream of savings is $213 Million. 14

13
In terms of real savings, the lowest level of annual savings estimated is-$25 Million in 2033 and the highest savings is $29
Million in 2036.
14
The difference in revenue requirement was discounted at a rate of 6.78 percent.
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FIGURE 4: PREFERRED ERP MINUS PREFERRED CEPP COSTS OVER TIME

In order to understand this profile of savings, it is helpful to identify some of the major events on
the overall timeline. In Figure 4, the dotted red line separates the RAP and post-RAP periods. It is clear
from this illustration that the events driving the largest cost swings are the end of the PTC payments in
2030 (since they are generated only for the first 10 years of the proposed Company-owned wind project
– W192) and the addition in 2034 of the 700 MW combined cycle (CC) unit in the ERP scenario (to fill
the need created by Comanche 1 and 2 retiring). The end of PTCs causes a large increase in the CEPP
costs whereas the addition of the CC in the ERP causes a large increase in the ERP costs.

It is important to note that this overall cost comparison includes the Company’s assumption
regarding treatment of PTC costs. In the modeling of revenue requirements for the W192 project, PTCs
are passed back to ratepayers as they are generated. However, the Company projects it will not be able
to utilize the PTCs in the early years of the project and therefore has added costs associated with
carrying and earning a return on a deferred tax asset. See Section IV.C for a detailed discussion of this
issue.

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Figure 5 shows the relative cost of the Preferred CEPP versus the Preferred ERP in terms of real
dollars as well as the cumulative cost difference over time. The CEPP represents a cost to ratepayers on
a cumulative basis until 2037.

FIGURE 5: REAL PREFERRED CEPP MINUS PREFERRED ERP COSTS

$100

Cumulative Savings
$50 Starting in 2037

$0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
Impact on RR ($2016)

($50) Cost Increase of $23M


per year (Real)

($100) Total Savings =


$213M (Real)

($150)

($200) Annual Cost Impact


Cumulative Cost Impact

($250)

2. Comparison of Portfolio Energy and Capacity

In order to unpack the differences between the Preferred CEPP and Preferred ERP portfolio and
the resulting savings presented by the CEPP, one needs to understand the differences in the system
capacity and energy. Figure 6 shows the differences in summer net dependable capacity over time. The
CEPP reflects a substantially larger amount of solar and storage capacity as well as relatively cheap CT
capacity used to fill-in capacity needs in combination with intermittent renewable energy resources (i.e.,
wind). The ERP, on the other hand, relies more on coal and the large CC which functions as both a
capacity and energy resource. To put these capacity differences in perspective, note that the net
dependable capacity on Public Service’s system today is approximately 7,400 MW. 15

15
120-Day Report Appendix G, Table 2.7-10 “PSCo Loads andResources.”
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FIGURE 6: SYSTEM CAPACITY DIFFERENCE

For the ERP, the system energy picture shown in Figure 7 looks similar to the capacity picture --
greater reliance on coal and Gas CC generation. The CEPP energy system reflects a greater mix of wind,
solar and CT generation. The Gas CTs play a "filler" roll in the short to medium term and then clearly
represent a substantial portion of system generation in the long-term as they are used to replace other
retiring system resources. Total generation on PSCo’s system in 2018 is forecast to be just under 32,000
GWh.

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FIGURE 7: SYSTEM ENERGY DIFFERENCES

3. Major Cost Categories

The cost differences discussed above can be broken down by category to show more specifically
the dynamics driving the results in the two scenarios. Figure 8 summarizes the major drivers of the
differences between the Preferred CEPP and ERP portfolio. Appendix A provides a more detailed
breakdown of these cost streams.

The coal savings shown below are derived by the early retirement of Comanche 1 and 2 thereby
avoiding fixed operation and maintenance (O&M), ongoing capital investments, and coal fuel
expenditures. The gas combustion turbines in the resource “tail” of the CEPP represent additional fuel
and capacity costs versus the ERP case, but those costs are more than offset by the avoidance of the fuel
and capacity costs for the gas combined cycle unit in the ERP tail. The CEPP reflects higher costs for
renewable capacity due to the larger amount of new wind, solar, and storage capacity and also higher
costs to integrate those renewables on to the system. The additional costs associated with accelerating
the depreciation for the retiring units is exactly offset by the RESA reduction and therefore does not
show up as a cost difference in either direction.
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FIGURE 8: SUMMARY OF MAJOR COST DIFFERENCES

F. Impact on Ratepayers

As mentioned above, Strategist does not model the entirety of the PSCo system. It is intended to
represent the electric generating and incremental transmission costs in a manner that allows for the
comparison across different generation portfolios. As such, the total revenue requirements shown in
Strategist do not reflect all of the costs ratepayers face or all of the revenues the Company collects. Nor
does Strategist model the trend in the number of ratepayers or usage over time. With that in mind, it is
not possible to estimate the overall bill impact of the different generation portfolios. That said, Staff
attempted a simple “back-of-the-envelope” comparison of the total PSCo Electric system revenue
requirement in order to put the difference in portfolio costs in perspective. This analysis assumes a
starting revenue requirement of approximately $3 billion, consistent with PSCo Electric’s 2017 10K.

Figure 9 shows the very approximate percentage change in PSCo Electric’s total revenue
requirement as a result of the CEPP using the Preferred ERP as the baseline. The CEPP represents as
much as a 2 percent increase in total revenue requirement in 2033 and close to a 3 percent reduction in
years 2036 through 2045.

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FIGURE 9: APPROXIMATE TOTAL COST IMPACT OF PREFERRED CEPP VS. PREFERRED ERP

3.0%
Percent Difference in Total Revenue Requirement

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

As mentioned above, Staff has a number of areas of concern with the Company’s estimated $213
Million in savings. These areas of concern, as well as a number of issues Staff believes the Commission
simply needs to be aware of, are discussed in the sections below.

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IV. MODELING AND EVALUATION CONCERNS

The General Overview above provides an understanding of PSCo’s estimated $213 Million in
savings provided by the CEPP portfolio and the drivers of those savings. This section of Staff's
comments details the concerns that Staff has with the Company's savings estimate.

In its 120-Day Report, PSCo characterizes the estimated $213 Million in savings from
comparing the Preferred CEPP versus the Preferred ERP portfolio as "conservative.” 16 On p. 93 of the
120-Day Report, it states "the $213 million of present value savings delivered by the Preferred CEPP,
when measured against the Preferred ERP, is the result of reasonable and well supported modeling
assumptions and reflects significant customer savings from a conservative point of view." It then
describes three potential areas of additional savings:

• The Alternative vs. Preferred CEPP ($20M)


• The alternative DTA approach ($20M)
• Updated AD/RR analysis ($26M)

Staff disagrees with the characterization that the $213 Million savings estimate is conservative
and the discussion below is intended to provide the Commission a more realistic view, neither
conservative nor aggressive, of the potential savings and risk factors. Staff takes issue with a number of
specific modeling assumptions incorporated by the Company subsequent to the Commission’s CEPP
Phase I order and addresses the potential areas of additional savings PSCo identifies.

A. Baseline for Comparison

Public Service devotes the bulk of the 120-Day Report narrative to a comparison between its
Preferred CEPP and its Preferred ERP portfolio, frequently referencing the $213 million in “customer
savings” provided by the Preferred CEPP in that comparison. While the Preferred ERP portfolio is only
$14 million more expensive than the least-cost ERP (aka, “LCP ERP”), it is important to examine why
the Preferred ERP portfolio has been selected and whether it is really a better choice than the LCP ERP.

16
Reference PSCo 120-Day Report, p. 8, " The approximately $215 million in savings is a reasonable yet conservative figure
for the Commission to use in determining a cost-effective resource plan in this proceeding."
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On page 31 of the 120-Day Report, the Company provides the following explanation for
selecting Portfolio 3 as its preferred ERP rather than the LCP ERP:

The primary difference between the Preferred ERP and the least-cost ERP portfolio is that the Preferred
ERP takes less battery storage and instead acquires an existing gas generator. This results in a Preferred
ERP that is $14 million more expensive on a present value basis than the least-cost ERP portfolio over
the Planning Period. Notwithstanding the relatively small cost differential, the Company identified the
Preferred ERP as preferable to the least cost ERP portfolio for several reasons, including the reliability
benefits of acquiring existing gas at a very favorable price for customers. Additionally, the Preferred ERP
is a cost-effective resource plan if the Commission determines it is not appropriate to move forward with
the early retirement of Comanche 1 and Comanche 2 at this time.

Given the emphasis in this proceeding on adding renewable resources to replace fossil resources,
Staff is troubled by this characterization. Is the Company suggesting the LCP ERP’s additional 125 MW
of battery storage and 110 MW of solar instead of the extra 220 MW of gas in the preferred plan
presents a reliability problem? Staff presumes not, since that would raise even greater concerns in the
CEPP scenario where 360 MW of dispatchable thermal resources are retired.

Setting that issue aside, Staff observes that compared to the Preferred ERP, the LCP ERP provides:

• 110 MW of additional solar and 125 MW of additional battery storage capacity,


• 219 MW less gas CT capacity (and thus 219 MW less gas CT Company ownership),
• Greater emissions reductions, and
• A higher level of economic development

Staff notes that the Preferred ERP portfolio does increase the level of Company ownership. This
understandably influenced the Company’ preference, but since this scenario does not include early
retirement of Comanche 1 and Comanche 2, it does not provide sufficient justification for bypassing the
more desirable LCP ERP portfolio with its additional benefits.

Staff concludes that the LCP ERP portfolio is the proper point of comparison to the Preferred
CEPP, from a cost perspective, an environmental benefits perspective, and an economic development
perspective. Using the LCP ERP as the basis for comparison, the CEPP produces modeled savings of
$199M. Staff also recommends that, should the Commission determine not to pursue the CEP, the least-
cost ERP portfolio is the appropriate choice to fill the 454 MW RAP need.

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B. Financial Evaluation Concerns

1. Discount Rate

In paragraph 94 of its Phase I decision, C17-0316, the Commission directed “Public Service to
use its after tax WACC in calculating NPV values as a base modeling assumption.” At the time of the
decision in April of 2017, Public Service’s after tax WACC was 6.78% based on the following
components: 17

• Capital Structure of 44.00% debt and 56.00% equity


• Return on debt of 4.67%
• Return on equity of 9.83%
• Income tax rate of 38.01%

The 38.01% income tax rate is the combined impact of the federal tax rate of 35% and the
Colorado state corporate income tax rate of 4.63%.

As the Commission is aware, the Federal Tax Cut and Jobs Act of 2017 (TCJA), signed into law
on December 22, 2017, changed the federal corporate tax rate from 35% to 21%. Subsequent to that tax
change, PSCo completed a refresh of bids received through its All-Source Solicitation. All Strategist
modeling used to evaluate the CEPP and ERP portfolio for the 120-Day Report was performed after that
process. Staff recognizes that this is a somewhat unique situation as the federal corporate income tax
rate does not change frequently. Staff believes it would have been appropriate for Public Service to
update its discount rate, based on an updated after-tax WACC, with the new corporate tax rate through
all Strategist modeling. The discount rate reflecting PSCo’s actual WACC, based on an updated
composite tax of 24.66%, is 7.05%.

Updating the Strategist portfolio revenue requirements results using PSCo’s current after-tax
WACC as the discount rate results in the portfolio revenue requirements shown in Table 5.

17
Reference AKJ-2 Table 2.7-1.
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TABLE 5: PORTFOLIO NPVRR REVENUE REQUIREMENTS

Portfolio DR = 6.78% DR = 7.05% Difference


ERP LCP $34.886B $33.629 ($1.258B)
Preferred ERP $34.900B $33.642 ($1.257B)
Preferred CEPP $34.687B $33.445 ($1.242B)

Preferred CEPP – ERP LCP ($199M) ($185M) ($14M)


Preferred CEPP – Preferred ERP ($213M) ($198M) ($14M)

2. Owned Resource Financing Assumptions

Staff believes it is appropriate and the Commission’s intent for the Company to consistently use
the Commission approved capital structure and debt and equity rates in evaluating all aspects of the
ERP. This includes the evaluation of the revenue requirements of the proposed Company owned units.
In calculating the revenue requirements for the Company owned units PSCo made the following
assumptions:

• Capital structure of 44.75% debt and 55.25% equity rather than 44.00% and 56.00%
• Long-term debt rate of 3.75% rather than 4.67%
• Composite tax rate of 24.66% for purposes of calculating the annual revenue requirement
• Discount rate of 6.78%, consistent with a composite tax rate of 38.1%

This appears to Staff as both lacking internal consistency and being counter to the Commission’s
intention to evaluate ERP resources with Commission approved financing assumptions. As stated
earlier, Staff believes that it is appropriate to consistently update the ERP analysis for the current federal
corporate tax rate. Staff notes that PSCo updated the revenue calculation for the new tax rate but not the
discount rate, creating an internal inconsistency.

The net result of adjusting the tax rate and financing assumptions to the Commission approved
levels does not make a large impact to the project revenue calculation, primarily due to the offsetting
nature of some of the assumptions. 18 Staff estimates that the net result of updating the revenue

18
Updating the financing assumptions increases the estimated revenue requirement while updating the discount rate
decreases the revenue requirement. In addition, several of the proposed owned resources appear in both the ERP portfolio and
CEPP.
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requirement for all proposed BOT projects is a CEPP savings reduction of approximately $2M. While
this is ultimately a small difference, Staff is more concerned with the lack of consistency and
transparency. Staff notes that the BOT financing assumptions are detailed within a hidden tab of
spreadsheets whose results feed into the Strategist modeling. This lack of transparency is time
consuming and makes it very difficult for Staff to verify results.

3. Revenue Requirement for Comanche 1 and 2

On page 70 of its 120-Day Report, the Company offers another potential source of additional
savings represented by the Preferred CEPP that was not included in the modeling and therefore is not
reflected in their $213 million number. As part of the AD/RR Proceeding 17A-0797E, the Company
updated several assumptions that impact the calculation of the Comanche 1 and 2 revenue
requirements: 19

• Impacts of the TCJA,


• Starting the revised depreciation schedules in 2019 instead of 2018 (due to dismissal of the
recently filed electric rate case, Proceeding 17A-0649E), and
• The proposal to begin the RESA reduction in 2021 instead of 2022.

Public Service represents that values incorporated in the Strategist modeling did not include the
revised depreciation schedule and that the net effect of this updated assumption reduces the overall
revenue requirement for Comanche in the CEPP case by $26 million, thus increasing the savings
compared to the Preferred ERP portfolio by the same amount.

Staff attempted to review the calculation of the revised revenue requirements (detailed in the
AD/RR proceeding) but cautions the Commission that this task is anything but straightforward due to
the differences in which data the Company chose to include in the comparisons, the starting years for
analysis, the base year for calculation of the NPV and uncertainty regarding whether similar updates
were made to the ERP scenario.

Based on the limited review Staff has been able to perform, we conclude that the $26 million
amount may be incorrect and should be disregarded until the calculation has been verified. It is Staff’s

19
Rebuttal Testimony and Attachments of Lisa H. Perkett, page 13, lines 1-5.
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hope that the Company will respond to the issues raised by the Coalition or Ratepayers either within the
AD/RR proceeding or in response to their expected comments on the 120-Day Report so that the
Commission will have reliable results to use in its final consideration of the proposed CEPP.

C. Production Tax Credits

The Federal government authorizes a Production Tax Credit (PTC) for wind projects built within
a certain timeframe which provides a dollar-for-dollar reduction in income tax liability. The value of the
PTC is based on the per-kilowatt-hour (kWh) electricity generated by qualified energy resources. The
PTCs are created for the first 10 years after the facility is placed in service. Tax credits are generated as
electricity is produced, but the value of the PTCs can only be realized when they are used to eliminate
tax liability. If a utility has no tax liability, or has other deductions or credits that eliminate tax liability
before the PTCs can be used, the PTCs can be carried forward for up to 20 years following the year they
were generated and used if there is sufficient tax liability to utilize the credit.

1. Understanding the Company’s ability to use PTCs

Public Service refers to its ability to utilize tax credits, such as the PTC, as its “tax appetite.” The
Company forecasts tax appetite for when it will be able to use PTCs. As with all forecasts, this estimate
is based on assumptions and includes uncertainty.

As Public Service noted in its Statement of Position, the Tax Cuts and Jobs Act’s (“TCJA”)
reduction of the corporate income tax rate from 35 percent to 21 percent lowered the Company’s tax
liability and slowed the ability to utilize deductions and credits. 20 Given this reduced tax appetite, the
assumption for when PTCs can be utilized is dependent on the assumption for other deductions and
credits that the Company can use to reduce tax liability.

Public Service has indicated that there is a specific order of operation for tax deductions, tax
credits and other tax adjustments that would affect the Company’s ability to use a PTC. The tax code is
complex and there are a lot of moving parts that could accelerate or slow the use of PTCs. It is useful to
focus on two tax adjustments that must be utilized before the Company can utilize PTCs associated with

20
120-day report., p. 54.
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the new project: 1) the accelerated depreciation that is at issue with this project and 2) the PTCs
associated with the Rush Creek wind project.

Public Service acknowledged that the acquisition of 500 MW of Company-owned wind through
the CEPP will result in inefficiencies in the usage of Rush Creek PTCs. An estimate of this increased
cost has raised the cost of the CEPP. However, there is uncertainty associated with this estimate
considering that final rate treatment will not be decided in this proceeding. 21

2. Financial Impact of Production Tax Credits

As mentioned above, Company ownership of eligible energy resources comes at a cost premium
and entails more ratepayer risk than does IPP ownership of this generation. This significant cost
premium associated with Company ownership of eligible energy resources (in this case wind) is
illustrated in Table 7 of the 120-day report when one compares the Preferred CEPP to the LCP CEP.
The Preferred CEPP, as modeled, is $114 Million more expensive than the LCP CEP on a NPV basis
while containing a similar amount of total renewable capacity. The MLEP, which contains a higher
percentage of Company ownership of renewables, as modeled, is $263 Million more expensive than the
LCP CEP on a NPV basis. The Company explains the most significant difference in these portfolios is
the “DTA” associated with Company ownership of wind generation. The DTA impact accounts for $82
Million of the $114 Million NPV portfolio difference according to the Company’s comparison of the
Preferred CEPP and the LCP CEP. 22 The DTA impact accounts for $169 Million of the $263 Million
delta between the MLEP and the LCP CEP. 23 These CEP portfolios are summarized in Table 6.

21
Decision No. C18-0191, at ¶ 95, mailed Mar. 22, 2018 (“We further conclude that it is premature and beyond the scope of
this ERP proceeding to address any specific ratemaking provisions”).
22
Staff believes this amount is likely understated and is more appropriately estimated to be $98 Million after adjusting the
assumed ROE to the Company’s currently approved level.
23
120-Day Report p. 56.
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TABLE 6: COMPARISON OF THE DTA IMPACT ON CEP PORTFOLIOS

LCP CEP Preferred CEPP MLEP CEP


Total Portfolio Rev. Req. ($M) $34,573 $34,687 $34,836
Difference from LCP CEP ($M) $114 $263
Cost of Utility DTAs ($M) $0 $82 $169
Percent of RR Difference from DTAs 72% 64%

It is important to acknowledge that this “DTA” issue is very complex and the Company’s
estimates are based on rate making principles that have not been approved and numerous forecasts that
have not been vetted or made part of this record. Nonetheless, the Commission must make a decision on
the Preferred CEPP with nothing better at this point than the Company’s estimates. Staff is concerned
with the level of uncertainty and risk associated with the Company’s ability to actually use the
Production Tax Credits (PTCs) in a timely and complete manner, and to actually pass on the cost
savings to customers, which are both assumed in the CEPP evaluation. The Commission is left in a
tough position and could reasonably assume the worst, that the Company will be unable to actually use
any of the PTCs before they expire. Under such an assumption, the carrying cost of the DTA, if
approved, would far outweigh the benefits passed on to ratepayers, resulting in a net cost. This appears
to be the position advocated by the JCM. Staff is not suggesting such an extreme position and is not
aware of any specific concerns with the Company’s forecasted use of the PTCs other than those stated in
these comments. However, because the Company is basing its presentation on customer savings, the
Company should be accountable to these estimates and ratepayers should not bear the risk that these
predicted savings could be materially eroded by higher than expected DTA costs.

Staff believes the Commission should do its best to ensure that ratepayers receive the benefit of
the bargain if it is to approve the Preferred CEPP. This is handled contractually via power purchase
agreements (PPAs) with IPPs. With respect to Company-owned wind and the ability of the Company to
deliver to ratepayers the benefit of PTCs, it likely requires a combination of reporting, monitoring and
ratemaking action on the part of the Commission. Staff agrees with the Company that the specifics of
reporting, monitoring and ratemaking approaches can likely be left to the follow on CPCN proceeding if
the Company-owned wind project is approved as part of the CEPP.

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3. Options for the Financial Treatment of PTCs

Staff believes the Commission would benefit from a discussion of the PTC issue here as Staff
has attempted to better understand the issue, particularly in the context of the alternative approach the
Company briefly discussed in its 120-day Report. As Staff understands it, when the Company originally
modeled the relevant BOT wind bid in Strategist, the Company developed a revenue requirement that
assumed the full value of the PTCs would be utilized as they are earned, and contemporaneously passed
on to ratepayers as a reduction to the ECA, providing the Preferred CEPP with significantly more
incremental savings associated with the Company-owned project than if the PTCs were not available at
all. However, we now know that the modeled assumption does not comport with reality, and the
Company cannot deliver the value associated with the PTCs as modeled. This required the Company to
compute a cost associated with the inability to utilize PTCs as earned, which it has chosen to do outside
the model on a portfolio basis. This is loosely referred to as the DTA impact.

Initially the Company presented an approach that assumed the value of the PTCs were passed on
to ratepayers in the ECA at the time they are earned. In this situation, it is expected that the Company
will credit ratepayers an amount in excess of what the Company can utilize for tax purposes in the early
years of the project, resulting in the Company creating a Deferred Tax Asset (DTA) on its books to
represent the amount of tax credits it “fronted” to ratepayers. The Company assumes it will be entitled to
a return on the DTA and assumes such return will be its Weighted Average Cost of Capital (WACC) in
its cost analyses. It should not be a given that the Company is entitled to its WACC for a future DTA
resulting from the project, but for purposes of this discussion Staff is adopting this assumption.
Therefore, the interest the Company would expect ratepayers to pay for this de facto loan would amount
to $82 Million on a NPV basis, increasing the modeled NPV of the CEPP by that amount. 24

As Staff understands one alternative approach, the Commission could decide to only credit
ratepayers in the ECA the amount of the PTCs that the Company has actually utilized to offset its tax
liability in any given year. To the extent the Company has “earned” tax credits that it has not utilized, it

24
In estimating the $82 million DTA impact, the Company assumed an increase from its current ROE of 9.83 to 10.25 in
2021. Staff believes it is more appropriate, and the Commission’s intent, that the ERP analysis be based on the Company’s
currently approved ROE. The higher earning assumption increases the Company's forecasted ability to use the PTCs for tax
purposes thus lowering the carrying charge. Staff believes it is more appropriate to evaluate the PTCs using the currently
approved ROE, resulting in an estimated $98 Million in PTC carrying costs.

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would hold these tax credits on its books to be used in future tax years. At the same time, it would hold a
liability on its books in the amount ratepayers are due to be credited in the future. There would be no
carrying charge associated with a DTA because the Company would not have loaned ratepayers credits
on the front end. 25 The Company asserts this alternative approach could save an additional $20 Million
on a NPV basis as compared to the original approach. 26 There are also a number of approaches in the
middle of these two which may be worth considering, and Staff believes all these approaches could be
more fully developed and vetted in the CPCN proceeding that would follow approval of the CEPP.

Each of the PTC approaches has its pros and cons. The first approach would pass on the benefits
of the tax credits to ratepayers in the ECA as they are earned, irrespective of whether the Company can
utilize them. This creates a more immediate and consistent benefit over time for the first 10 years of
project operation, resulting in less rate volatility, but it imposes additional cost. While the Company
believes the cost is roughly $82 Million on a NPV basis ($98 Million using Staff’s ROE assumption),
the actual cost is largely uncertain. Of the two critical variables, PTCs earned and tax liability, Staff has
much more confidence in the Company’s practical ability to estimate the credits earned as opposed to its
tax liability years into the future. This creates risk, and such risk is material given the magnitude of the
estimated DTA as compared to the savings ($98 Million DTA v. $213 Million in CEPP savings).

The alternative approach has appeal because it would eliminate the carrying cost associated with
a DTA and a significant amount of risk, while potentially reducing the NPV of the CEPP by $20
Million. 27 However, it would also increase the revenue requirements in the early years of the project and
result in a much greater degree of rate volatility over time. There may be other approaches that better
balance the objective to mitigate the DTA risk with the objective of rate stability, and these can be more
fully discussed in a follow-on CPCN proceeding. The Commission should also be aware that the
approval of the Preferred CEPP would result in a change to the assumptions related to the utilization of
Rush Creek PTCs, an issue which Staff believes can and should also be addressed in the follow-on

25
As Staff understands it, this approach would also have no impact on rate base or the Company’s earnings due to offsetting
entries on the books.
26
This approach does not eliminate the company ownership premium due to the time value of money. Delaying the PTC
benefit passed on to ratepayers creates an economic loss of approximately $75 million using the 9.83 ROE.
27
The $20 million estimate correlated to the Company’s ROE assumption of 10.25 and DTA impact of $82. Staff believes
the difference in approaches, using the current WACC, is $24 million.
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CPCN proceeding. Table 7 summarizes the Company's estimate of the PTC benefits to ratepayers under
the two approaches discussed here.

TABLE 7: ESTIMATED PTC IMPACT FOR DIFFERENT TREATMENT OPTIONS


ROE = 9.83%
Value of PTC
Avoided Taxes
Total Potential PTC Value
1. PTCs "As Generated" Approach
Impact of DTA Carrying Charge ($98.2M)
Net PTC Benefit to Ratepayers
2. PTCs "As Utilized" Approach
Impact on Current Inc. Tax Expense
Impact of Time Value of Money
Net PTC Benefit to Ratepayers
Difference between Approaches $23.5M
Note: Values shown above assume a discount rate of 6.78%.

For purposes of this proceeding, Staff believes the Commission could consider the $98 Million
NPV assumption as a reasonable proxy for the PTC/DTA cost premium associated with Company
ownership of wind. Note that this does not represent the highest cost that could be associated with the
DTAs generated by the Company owned wind project and is therefore not a "conservative" cost
projection. Rather Staff views this as the Company’s best cost estimate, consistent with the modeling in
this proceeding. This cost is unique to Company ownership and is a critical component of the
cost/savings analyses. Should the Commission approve the Preferred or Alternative CEPP using this
assumption, it should also have reasonable processes in place to monitor the flow of PTC benefits to
ratepayers and any offsetting costs, and be in position to take appropriate action through future rate
proceedings and ECA cost reviews if things do not go as expected. Ultimately, ratepayers should not be
asked to assume all the risk of the DTA, which theoretically could grow much larger than projected and
significantly erode the already tenuous savings modeled for the Preferred CEPP.

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D. Comparison of Portfolios with Different “Tails”

As mentioned above, the modeling exercise of comparing two portfolios with different resource
needs during different time periods is analytically very complicated and has not previously been done as
part of an ERP process. This section of Staff’s report attempts to describe some of the consequences of
comparing portfolios with different tails and the modeling conventions used to develop those tails.

1. 190 MW Replacement CT in 2026

As ordered by the Commission, the Company performed Strategist modeling optimizations using
both the “replacement method” and the “annuity method.” Bid resources that are selected during the
RAP will generally either retire or reach the end of the PPA prior to the end of the planning period and
that capacity must be “backfilled” by the model. The main method relied upon by PSCo in the 120-Day
Report is the replacement method whereby bid resources are backfilled using the lowest cost Company
self-build CT proposal, a modeling convention approved in Phase I. In contrast to the replacement
resources, the model uses more expensive “generic” gas resources to fill capacity needs that occur
outside of the RAP period.

The Company’s Preferred CEPP includes 993 MW of firm capacity added during the RAP.
However, this does not fill all of the Comanche 2 resource need that occurs when that unit retires post
RAP, at the end of 2025. Thus in 2026 there is a capacity shortfall that must be filled in the model. The
Company chose to fill this need with a “replacement CT” that is usually reserved for backfilling RAP
resources. This aspect of the modeling was not explained by the Company in its CEPP proposal nor
specifically addressed by any parties in the “Phase 1.5” proceeding. By allowing the CEP portfolios to
select the cheaper replacement CT outside of the RAP period, the Company artificially lowers the cost
of the CEPP and introduces an additional bias in the results when attempting to compare the CEPP
scenario to the ERP scenario.

While acknowledging that the Commission did not disallow the Company’s modeling
convention for this scenario, Staff contends that neither did it approve this approach. This is yet another
example of why modeling assumptions that are acceptable for an ordinary ERP, in which combinations
of RAP resources are compared against each other in conjunction with the same fixed tail, do not work

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properly when comparing scenarios with different resource needs and different fixed resources in the
tail.

In order to understand the potential impact of this modeling assumption, Staff calculated the
difference in total revenue requirement between a replacement CT and a generic CT added to the system
in 2024. The NPV of the difference between the revenue requirement of these two units is
approximately $58 Million. As an alternative estimate of the impact, Staff also looked at Portfolio 7,
which is shown in the 120-Day Report as the “CEP Full Replacement” portfolio that fills the full 1,110
MW need in the RAP (i.e., includes replacement capacity for both Comanche 1 and 2). As described on
page 52, this portfolio includes an extra gas project (Bid ID C172) and costs $17 million more than the
Preferred CEPP.

Staff concludes that the use of the replacement CT to fill part of the Comanche 2 capacity need
in 2026 overstates the savings of the Preferred CEPP (compared to the Preferred ERP portfolio) by at
least $17 million and up to $58 million on an NPVRR basis.

2. Modeling of Generic CTs

On Wednesday, July 18th 2018, Staff discovered that sometime after providing Staff with the
“baseline” Strategist files, the Company changed the pricing assumptions associated with generic CT
units in its final modeling resulting in a different “baseline” model than the one previously provided to
Staff. The Company explained that in reviewing the Strategist portfolio results, it had determined that
the less expensive replacement CTs 28 were being dispatched at unrealistically high capacity factors,
sometimes greater than 90%. 29 According to the Company, in addition to representing unrealistic
operation of those CTs, this also resulted in skewing the bid selection in favor of a large CT with low
operating costs (i.e., the replacement bid). It appears this occurs because significant generation is needed
from the CT fleet in a number of years and therefore a large CT that can provide significant energy at a

28
Based, as approved in Phase I, on the lowest cost self-build CT bid
29
According to the Company, no limits (other than unit availability) are applied to CT capacity factors in Strategist modeling.

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reasonable cost will appear to be a good deal, even if the unit could not actually be operated in that
manner. 30

As Staff understands it, the Company’s solution was to lower the dispatch cost for generic CTs
to make them equal to the replacement CT in order to spread the CT generation across more units. This
modeling change involved eliminating the variable O&M cost for generic CTs and setting the heat rate
equal to the lower replacement CT value, thus changing two inputs established in Phase I of this
Proceeding. The Company says that it discussed this issue extensively with the IE and that the IE was
involved in settling on the solution. Staff has not discussed this issue with the IE, and previous to July
18th, was unaware of the modeling change.

Staff agrees that the initial modeling result likely indicated a problem that needed to be
addressed. However, Staff does not agree that the Company’s course of action was the appropriate one.
The Company should have contacted not just the IE, but also the Commission. Changing a modeling
assumption approved in Phase I in the middle of the Phase II modeling process requires the consent of
the Commission; PSCo did not inform Staff of this change at any point, nor did it include information
about this change in its 120-Day Report.

Putting aside the Company’s lack of seeking Commission authorization, Staff is also concerned
with the methodology applied to “fix” this problem. While there has not been time to fully explore the
issue, Staff would point out that a change of this nature should actually require a full re-optimization of
the baseline. Otherwise, there is no way to know whether the model would choose different resources
for the tail. This re-optimization was not conducted.

Given the timing of the problem and the expedited nature of this Phase II process, re-
optimization would not have been a realistic option. But Staff can think of several possible alternative
solutions that should have been considered (and presented to the Commission).

• Limiting the availability of the cheaper replacement units to a more reasonable operational level
so that Strategist would have to dispatch the generic CTs,
• Limiting the operation of the replacement units through emissions limits,

30
In a related issue, because the Surplus Capacity Credit is based on the fixed cost of a generic CT and many bid CTs have a
significantly lower fixed cost, excess capacity is effectively being over-valued, resulting in portfolios with exactly 100 MW
of surplus capacity appearing to be the least cost option.
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• Changing the dispatch costs for just the replacement CT,


• Proposing a different replacement unit with pricing that is more similar to the generic CT, or
• Simply raising the dispatch costs for the replacement CT.

It is possible that these approaches were discussed with the IE, but since neither the Company
nor the IE alerted Staff or the Commission to this problem, we are left having to speculate and hope that
the ramifications of this significant change were thoroughly vetted.

Staff has attempted to characterize one way of looking at the cost impact of this unauthorized
change. Staff has calculated the reduction in generation costs in the Preferred CEPP compared to the
Preferred ERP portfolio by multiplying the annual difference in generic CT generation between the two
portfolios by the reduction in the VOM costs. 31 Based on this calculation, Staff estimates the Company’s
use of lower-than-approved costs for the generic CTs has reduced the Preferred CEPP (relative to the
LCP ERP portfolio) by approximately $8 million on a NPVRR basis. 32

3. 700 MW Combined Cycle in 2026

As illustrated in Figure 4 above and argued by Staff in CEPP testimony and by the Coalition of
Ratepayers in both CEPP and AD/RR testimony, the generic combined cycle unit that is added in 2034
in the ERP baseline tail, but not the CEPP baseline tail is a significant modeling issue and driver of the
overall estimated savings. While the Commission approved the use of this baseline, as well as the costs
assigned to that CC, Staff is compelled to explain how this impacts the modeling results and produces
“savings” for the CEPP that are by no means certain to materialize.

In its CEPP testimony, Staff advocated for a new approach to creating the baseline Strategist
runs in order to more fairly compare a CEPP scenario and an ERP scenario. This approach would have
provided generic renewables at forecasted prices for optimizing the tail. Staff still believes this would
create a more realistic picture of the future PSCo system and, most importantly, a more reasonable basis
for comparing the CEPP with the ERP. Given the current pricing and trajectory for wind, solar and

31
The Company provided all of the information requested by Staff to assist in understanding how these costs are modeled
and how the change in CT pricing was implemented. Staff acknowledges that the actual modeling of VOM is more
complicated than subtracting an old number from a new number, but believes that this calculation is a legitimate estimation
of the impact of changing the variable cost of the generic CTs. Staff did not attempt to account for the change in Heat Rate as
this is substantially more complicated and it appears that the bulk of the cost difference is in the VOM change.
32
Staff estimates that this unapproved change decreased costs of the Preferred CEPP by $6.5 relative to the Preferred ERP.
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storage, Staff finds it unlikely that a new 700 MW combined cycle unit would be the resource of choice
for replacing Comanche 1 and 2 capacity and energy in 2034 (just as it is not the resource of choice in
the CEPP scenario now).

Why does this matter? When viewing the Preferred ERP and Preferred CEPP costs on an annual
basis, it is clear that they diverge sharply starting, not coincidentally, in 2034. The goal of Strategist
modeling is to compare the relative merits of various portfolios created to fill the resource need during
the RAP, but the divergence in this instance is not due primarily to differences in costs created by RAP
resources. The ERP portfolio cost premium is largely driven by the CC, which is expensive from both a
capacity and energy perspective compared to the capacity and energy resources acquired to meet the
Comanche 1 and 2 resource needs in the CEPP.

The cost premium of the CC is difficult to characterize fairly since there are no other options that
could be assumed to take its place. While there is no perfect method to equalize the different tails in this
attempt to compare status quo and early coal retirement scenarios, Staff believes including generic
renewable resources in the optimizing of the baseline model runs would have led to a more realistic
comparison.

4. 4B Sensitivity Analysis Results

In Decision No. C18-0191 allowing PSCo to present its CEPP, the Commission agreed with
Public Service witness Jim Hill’s proposal to offer a “middle ground” sensitivity analysis to address
Staff’s concerns about the all-gas baseline tail referenced above. Staff believes that the modeling results
demonstrate that this sensitivity does not address the concern Staff raised in testimony.

As the Commission will recall, Staff argued that the Company’s method of optimizing a baseline
using only gas resources in the tail creates an unrealistic view of the future. Most importantly for the
decision before the Commission now, that optimization method created different fixed tails for the ERP
and the CEPP that make attempts to compare the relative merits of portfolios across scenarios suspect.
The substantial differences between the fixed tails would likely have been minimized if renewable
resources had been available to the model during initial optimization to create the baselines.

The Company’s 4B sensitivity cases do not ameliorate Staff's concern. This sensitivity simply
adds some wind and solar resources to the fixed tail on top of the two existing baselines and the
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established RAP portfolios. No model optimization is performed. Not surprisingly, this does not create a
very substantial shift between the ERP and CEPP costs. Overall, it lowers the CEPP costs by an
additional $22 million compared to the ERP portfolio.

The Company explains this result by pointing out that in the CEPP scenario, the type of gas
generation is more “CT weighted” than the ERP scenario. Therefore additional wind and solar resources
are displacing more gas CT operation than gas CC operation. Since gas CTs operate less efficiently than
gas CCs, the overall effect is to lower the CEPP costs by a greater amount. Staff would point out that
this reinforces its argument that it is unlikely to be cost effective to acquire a CC in 2034 when low cost
renewable energy in combination with a cheap capacity resource (either a CT or storage) is available.

E. Storage

The Company received numerous energy storage proposals, demonstrating today’s competitive
and evolving energy storage market. The energy storage proposals offer a variety of configurations,
including standalone storage, storage coupled with natural gas generation, storage coupled with wind
generation and storage coupled with solar PV generation. The Company’s 120-day report LCP ERP as
well as the preferred portfolios, both Preferred ERP and Preferred CEPP, include proposals that offer
energy storage coupled with PV solar generation, and specifically batteries using lithium ion chemistry.
The LCP ERP portfolio contains 175 MW of storage while the Preferred ERP includes only 50 MW of
storage and the Preferred CEPP includes 275 MW of storage capacity.

In its comments on PSCo’s120-Day Report, the Independent Evaluator addresses storage in


depth. Due to the numerous issues raised by the complexity of this evaluation exercise and the limited
time, Staff plans to address storage, storage modeling, studies, and reporting as part of its response to the
IE’s comments. In addition, Staff will provide comments on additional reporting and studies that may be
appropriate going forward.

F. Summary of Issues

Staff is very troubled by the numbers of issues uncovered in its review of the ERP modeling in
this Proceeding as well as having concerns with the overall modeling construct. As mentioned above,

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Staff recognizes that this exercise has been novel and extremely complex. However, it appears to Staff
that in every instance where the Company had some discretion in determining the evaluation process,
and in some cases when they did not have discretion, the path chosen favors the CEPP over the ERP
portfolios in a manner that makes the playing field far from level. Table 8 summarizes the cost impact
estimates of the issues Staff has been able to identify and quantify. Given that we were still uncovering
significant issues days before the filing of this report, Staff is not confident that all pertinent issues have
been addressed.

TABLE 8: SUMMARY OF STAFF'S CONCERNS


Cost Impact ($M)
LCP ERP vs. Preferred ERP Baseline $14M
Discount Rate Update $14
BOT Financing Assumptions $2
PTC/DTA Treatment $16
Replacement CT in 2034 $17 to $58
Modeling of Generic CTs $8

Total Reduction in Savings Estimate $71 to $109

A $70 Million to $110 Million reduction in savings implies that the CEPP may still represent
between $105 Million and $140 Million in savings to ratepayers. However, the modeling assumptions
regarding the fixed tail resources, including the 700 MW CC and lack of economic renewable additions
outside of the RAP, likely have the largest impact on overall CEPP savings. Staff is unable to even
attempt to quantify the impact of these assumptions; that is the entire quantitative exercise being
performed here. Staff is left in the uncomfortable position of being unable to infer a lower bound on the
estimate of CEPP savings.

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V. OTHER FACTORS FOR THE COMMISSION TO CONSIDER

A. Alternative vs. Preferred CEPP

Along with the Preferred CEPP, which includes the development of over 1,800 MW of new
renewable capacity, the Company also describes an Alternative CEPP with a similar mix of resources
but with one less solar plus storage resource, reducing the total amount of new solar from 707 MW to
457 MW and the amount of battery storage from 275 MW to 150 MW. There are clearly advantages and
disadvantages to this "delayed" approach, some of which are described blow.

Benefits of the Alternative Portfolio:

• The Company forecasts a cost reduction of $18 Million for the CEPP vs. Preferred ERP under
this delayed approach. 33
• The Company does not currently need all of the Preferred CEPP capacity due to the modeling
assumption that the Comanche 2 capacity be replaced during the RAP when the coal unit is
proposed to retire post-RAP in 2025 creating a capacity need in 2026.
• The cost of renewable projects is forecast to decline. 34 Delaying a solar plus storage project until
the next ERP may result in even lower project costs at that time.
• The Company has relatively little operating experience with battery storage. Delaying the
development of one battery storage project will allow PSCo time to gain experience in operating
its system with a still significant amount of new storage and to better understand the true benefits
storage provides to the PSCo system.
• The cost of import tariffs on certain crystalline PV solar panels currently at 30% decreases
annually by 5 % until 2021 when the tariff sets at 15%.

33
This cost savings estimate was developed by running a sensitivity on the Preferred CEPP where the development of Bid
X647 is delayed by three years. This sensitivity is not an economic optimization and assumes that the exact same bid will be
available to the system three years later.
34
Recent articles supporting a downward trend in storage pricing include:
https://www.greentechmedia.com/articles/read/siemens-may-sell-gas-turbine-
business?utm_source=GridEdge&utm_medium=email&utm_campaign=GTMGridEdge#gs.QamcpsA,
https://www.greentechmedia.com/articles/read/pge-proposes-worlds-biggest-batteries-to-replace-south-bay-gas-
plants?utm_source=GridEdge&utm_medium=email&utm_campaign=GTMGridEdge#gs.PyJkMgY, and
https://www.utilitydive.com/news/pge-to-replace-3-gas-plants-with-worlds-biggest-battery-projects/526991/.
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• There are likely to be some diminishing returns from large amounts of storage capacity, so the
most value will likely be captured by the first ones developed.

Potential Disadvantages of the Alternative Portfolio:

• There is no guarantee that a similarly priced project will be available in three years.
• The response to this All-Source Solicitation was particularly robust due to the relatively high
resource need being evaluated. Staff anticipates a substantially lower resource need in the next
ERP. Developers may be more inclined to pursue other markets.
• While it may be possible that a project acquired in the near future qualifies for federal ITCs, that
subsidy is being phased out and there is no guarantee that the timing of the next ERP would
allow for construction to be completed by 2024.
• Delaying project X672 would result in lower economic development benefits. In particular,
benefits would be lower for the Pueblo area where X672 is proposed to be sited.
• Delaying the acquisition of one storage project will allow PSCo to gain some experience with
this relatively new technology before considering more storage in the next ERP. However, it
won’t gain much experience since the storage projects included in the Alternative CEPP won’t
come on-line until 2023.

IRS Notice 2018-59 35 issued on June 22, 2018 provides guidance on the requirements and
availability of federal ITCs for new solar projects and other generation technologies. Table 9
summarizes these guidelines. A project acquired during this ERP Proceeding most likely reflects the
benefits of a 30% ITC. A project acquired during the next ERP would likely qualify for some ITC but it
is not clear how much. The combined uncertainty in future renewable project costs and ITC availability
makes it difficult to assess the likely project pricing for any "delayed" project.

35
U.S. Internal Revenue Service (IRS) issued Notice 2018-59 providing updated guidance regarding the “beginning of
construction” requirement as it relates to investment tax credit (ITC) under IRS Code Section 48. Developers can claim a
30% tax credit for solar projects as long as they prove they’ve started construction by the end of 2019. That means breaking
ground or investing at least 5 percent of the total expected costs of the installation, and they have until the end of 2023 to
complete the power plants. For projects that begin construction after Jan. 1, 2020, the credit drops to 26 percent.
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TABLE 9: SUMMARY OF FEDERAL ITC GUIDELINES FOR SOLAR ENERGY PROJECTS


Date Construction Date Placed in Service
ITC Percentage
Begins
Before 1/1/20 Before 1/1/24 30%
1/1/20 -- 12/31/20 Before 1/1/24 26%
1/1/21 -- 12/31/21 Before 1/1/24 22%
Before 1/1/22 On or after 1/1/24 10%
On or after 1/1/22 Any 10%

Staff also notes that representing that the Alternative CEPP increases overall savings by $18
Million is not an apples to apples comparison. The Alternative CEPP benefits are driven by the
assumption that a low-cost renewable resource is available to the system outside of the RAP period. This
resource was not made available to the Strategist model either in the CEPP optimization modeling or
during the ERP modeling. Staff is clearly supportive of the idea that the price for renewables is
declining, that renewables are already competitive with thermal gas resources, and that a modeling
future where only gas resources are available to the system is not realistic. However, that was not the
modeling construct used in this ERP. Staff does not find it appropriate to consider this potential savings
of $18 Million as support for the Company's assertion of a "conservative" savings estimate. 36

B. Review of Proposed Gas Ownership

Both the LCP ERP portfolio and the Preferred CEPP include Company ownership of the existing
82 MW CT G065 gas resource. Both the Preferred ERP portfolio and the Preferred CEPP include
Company ownership of the existing 301 MW CT G215. Staff believes it would be helpful for the
Commission to understand more about these CTs PSCo proposes to acquire as Company-owned
resources.

The CT G215 is an existing two unit CT plant that currently serves Public Service loads through
a PPA. The technology is typically described as a “heavy” or “frame” type gas turbine. The particular
model of CT was first introduced in 1989. This technology has seen wide deployment and has provided

36
According to the Company, the CEP 1100 MW cases allowed Strategist to only fill 775 MW, but none of the resulting
portfolios presented were that low on capacity. The model did not have an option to select a solar + storage resource at the
2023 price in 2026. Therefore, there is no way to know what other portfolios would have resulted under those modeling
assumptions or their relative cost.
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millions of hours of reliable service. Staff understands that these particular units were first put into
commercial operation serving Public Service’s load in 2000. The Company has provided no evidence to
the Commission or Staff regarding any due diligence activities it performed to assess the condition or
value of the resource. As a result, Staff recommends that the Commission order the filing of a limited
scope application for a Certificate of Public Convenience and Necessity (CPCN) to provide the
Commission with assessments of cost and facility condition prior to completing a purchase of the
facility as part of either the Preferred ERP or the Preferred CEPP.

The CT G065 is also an existing two units CT plant that currently serves Public Service loads
through a PPA. The technology is typically described as an “aeroderivative” type gas turbine meaning
that the resource was derived from aircraft turbine technology. This technology of CT was first put into
commercial operation in 1992 and later versions of the same technology are being deployed today. This
technology has seen wide deployment and has provided tens of millions of hours of reliable service.
Staff understands that these particular units were first put into commercial operation serving Public
Service’s load in 2000 and 2001. The Company provided limited evidence in the form of a third party
technology assessment performed on behalf of the bidder. The Company has not offered any evidence to
the Commission or Staff regarding any due diligence activities it performed to assess the condition or
value of the resource. As a result, Staff recommends that the Commission order the filing of a limited
scope application for a Certificate of Public Convenience and Necessity (CPCN) to provide the
Commission with assessments of cost and facility condition prior to completing a purchase of the
facility as part of either the LCP ERP or Preferred CEPP.

Last, Staff is pleased that the Preferred ERP portfolio and Preferred CEPP both propose
acquisition of existing gas generation rather than new gas generation development considering the recent
expressed policy proposals to move toward much higher levels of clean energy resources or even 100%
non-emitting energy resources. The acquisition of new gas generation would have a significant risk
associated with stranding these resources in the future.

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C. Other Economic Benefits

As requested by the Commission,37 Public Service provided an economic impact analysis of the
Preferred CEPP on both a statewide and Pueblo County basis. This study, referred to in the 120-day
report as the “Leeds study,” concludes that Pueblo County is positively impacted by the installation of
solar generation and transmission facilities, although this is partially offset by the early retirement of the
Comanche 1 and 2 coal-fired generators. The study also concludes that other Colorado counties benefit
from the installation of additional investment. And, while there are positive impacts, there are also
negative impacts compared to the Preferred ERP portfolio.

“There are years that the Preferred Colorado Energy Plan yields economic drag for the state and
Pueblo County compared to the Preferred Electric Resource Plan—primarily in the medium-term
for Pueblo County and near the end of the forecast horizon for the state.” 38

Economic studies of this type are determined largely by the quality of the inputs and
assumptions, with particular importance placed on the magnitude of the multipliers and the methodology
used to apply them. 39 The Leeds report is not transparent, and the Company did not provide sufficient
additional support to allow Staff to determine the quality of the results. Even an input as simple as the
discount rate is unclear. The report simply stats that the "impacts are presented in fixed, 2018 dollars and
discounted by the model using industry price deflators." Staff is left to observe that, at the least, the base
year of 2018 in inconsistent with the 120-Day Report, as is the time horizon of the study, and the
discount rate is simply unknown.

The Leeds analysis was dependent on data provided by Public Service, including capital
expenditures, operating expenditures, revenue requirements and taxes for each scenario. As the Leeds
Study notes, “the research team worked under the assumption that the company provided good-faith
estimates for each scenario.” 40 The Company provided no written explanation and support for the model

37
Paragraph 123 of Decision No. C18-0191
38
Leeds Study page 6.
39
A multiplier is a numeric way of describing the full effects of money changing hands within an economy.
40
Leeds Study, page 1.

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inputs provided to Leeds, indicating that explanation and support around these data was provided to
Leeds by teleconference. 41 Thus, Staff could not evaluate these forecasts.

That said, there are a few input numbers referenced in the report that Staff did attempt to verify.
For example, the report refers to a total reduction in revenue requirement of $431.5 Million. 42 This is
included in the economic benefits calculus as a benefit to customers through lower utility bills.
However, Staff has no idea how this estimate of the change in revenue requirements is derived. PSCo's
120-Day Report consistently refers to the difference in revenue requirements between the Preferred
CEPP and Preferred ERP as $213 Million, and Staff believes even that estimate is overly optimistic. In
addition, the Leeds Report evaluation period is only 23 years, through 2040, as opposed to the ERP
evaluation period through 2054. Using PSCo's estimate of the revenue requirement differences through
2040 yields a total CEPP savings estimate of $71 Million, a far cry from $431 Million.

The Leeds Report explains that the $431.5 Million in revenue reduction is "mostly due to the net
decrease of $970 million in lower fuel costs..." 43 Again, Staff is unable to verify this amount of fuel
savings. As shown in Figure A3 of Appendix A of this response, Staff estimates that the fuel savings
from Company generation in the CEPP is a total of $373 Million. 44 The source of an additional $597
Million in fuel savings is unclear. 45

In addition to these large questions surrounding the veracity of the model inputs, the model used
for analysis by Leeds is provided by an outside consultant (REMI) and is the proverbial “black box,”
preventing Staff from evaluating the methodology or inputs. When Staff requested support for the
model, the Company did not provide population or other forecasts used to calibrate the REMI model,
saying that Public Service “does not have access to such data from REMI.” 46 The Company also stated
that there was no documentation or support provided by REMI. 47

41
CPUC18-03
42
Leeds Report at pp. 2, 11, 16, and 17.
43
Leeds Report at p. 17.
44
Staff's estimate of fuel savings includes the change in total coal and gas costs from utility-owned generation as well as the
existing contracted fossil generation.
45
It appears possible to Staff that the Leeds comparison may be based on the “All Thermal” case. This could explain the
much higher fuel savings and subsequent higher reduction in revenue requirements. The difference in the Leeds numbers and
PSCo published numbers for the “All Thermal” case could be explained by the difference in the time horizons of the studies.
Staff notes that the “All Thermal” case would not be an appropriate point of comparison as it is not a scenario any party is
presenting as a reasonable view of Colorado’s future.
46
CPUC18-02
47
CPUC18-07.
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Staff concludes that the Preferred CEPP may result in a positive economic impact for Pueblo
County in the same way that economic activity is generated if a building is destroyed and rebuilt. The
decision about whether a building should be destroyed and rebuilt should be made based on the value of
that project, not the economic impact of an exercise that will utilize dollars that could be used for
another possibly more beneficial purpose. The magnitude of the economic impact provided in the Leeds
report is impossible for Staff to validate, but is likely much smaller than the estimate provided by Leeds.

D. Effective Load Carrying Capacity (“ELCC”)

1. Wind and Solar Credit Determination

Because eligible energy resources such as wind and solar are intermittent generation resources,
the Company must estimate, to the best extent possible, the contribution of these resources to serve
system peak load. The Company uses the ELCC methodology to provide this estimate. ELCC values for
the existing solar fleet are used in the Company’s loads and resources tables to determine the need for
incremental resources in order to meet planning reserve reliability targets. ELCC values for incremental
solar resources are used to evaluate the economic value (e.g., avoided generation capacity costs) of
proposed solar projects.

During phase I of this proceeding, the Company provided updated studies on Effective Load
Carrying Capability (ELCC) of renewable energy resources; wind and PV solar. Specifically, the
Company provided Incremental Wind ELCC and PV Solar ELCC values used in phase II portfolio
evaluation. The Company ELCC study references numerous other studies that demonstrate the law of
diminishing returns for the generation capacity credit attributable to higher penetrations of non-
dispatchable generation. That is, all else equal, the value of avoided generation capacity attributable to
incremental solar is less than the value of the avoided generation capacity of the existing solar.

2. Storage ELCC Credit Determination

During phase I of this proceeding, the Company presented a proposal for an Energy Storage
Modeling methodology. As part of the proposed methodology, and similar to prior wind and solar ELCC
value determinations, the Company ELCC for storage was based on a published study for estimating

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Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
Public Version

capacity value of energy storage. 48 While storage can be used for different purposes, (e.g., frequency
regulation, voltage control), the study identified the maximum value of storage capacity and
correspondingly higher ELCC is associated with treating storage as equivalent to conventional power.
That is to say, the highest value from storage is achieved by treating the storage unit as a dispatchable
generator that displaces other generation.

The Company’s Preferred CEPP includes three solar plus battery projects. Staff’s review of
solar+battery bid evaluation worksheets show that the Company did include the appropriate ELCC
based on the resource’s duration of discharge cycle.

The 120-day report Appendix K provide the Company explanation of storage modeling
performed in the storage bids and dispatch limits conditions imposed by project developers. For projects
that proposed wind or solar with storage, the Company’s generation capacity credit afforded to such
projects was the simple sum of the generation capacity credit for the renewable energy resource plus the
generation capacity credit for storage component on standalone basis. Absent any operational experience
with such resource configurations, Staff concurs with the Company’s approach.

Staff expects in the future, similar to updated wind and PV solar ELCC studies, the Company
will provide updated storage ELCC studies that further define, measure and evaluate the benefits of
battery storage on system operations.

E. EVRAZ Contract

The Company represents that the Preferred CEPP is necessary in order to enable the EVRAZ
contract. Page 11 of the 120-Day Report states that the CEPP would "enable an EVRAZ contract to help
keep this anchor of the Pueblo business community in Colorado." And on page 33 of the Report, PSCo
states that the "Company would obtain very low levels of new investment from the Preferred ERP,
which in turn makes it difficult to take on the shareholder risk that is necessary to enable the EVRAZ
contract." PSCo has provided no support for this claim. PSCo has recently had two large CPCNs
approved by the Colorado Commission for the company-owned Rush Creek wind facility and for the

48
IEEE Transactions on Power Systems, Vol. 29, No. 1, January 2014. “A Dynamic Programming Approach to Estimate the
Capacity Value of Energy Storage,” Ramteen Sioshansi, Seyed Hossein Madaeni, and Paul Denholm.

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Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
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Company's AGIS (Advanced Grid Intelligence and Security) initiative. These projects represent $
Million and $ Million in earnings respectively. 49 Staff does not find the argument that PSCo needs
the CEPP in order to be able to offer EVRAZ a contract to be persuasive.

Staff agrees that a contract between PSCo and EVRAZ "combined with other incentives
provided to EVRAZ by state and local government authorities, could enable substantial investments in
new production facilities at the EVRAZ steel mill in Pueblo as well as on-site solar, which will increase
the overall economic impact of our plan.” 50 However, that contract is not currently before the
Commission and the record in this case provides no information regarding the details of the potential
contract or a quantification of the potential benefits to the city of Pueblo. As such, Staff believes the
Commission has no other choice than to decide the merits of the CEPP based on the economic modeling
specific solely to that plan, including the economic development benefits described in the LEEDs study.

VI. ON-GOING STUDIES AND REPORTING

Staff may provide more complete comments on future studies and reporting in response to the
IE’s report, but wanted to provide some brief comments here.

Generally, Staff wants to encourage continued and expanded communication and collaboration.
Staff relies on the Company to keep it and the Commission “in the loop” on ERP modeling. In
particular, Staff requests updates on the modeling platform PSCo intends to use for future ERP filings.
In addition, Staff believes the following studies or updates would be appropriate before or as part of the
next ERP Proceeding:

• Updated study of storage credits and operation. Storage studies should identify the preferred
storage type, expected system benefits and what the storage value stack looks 51 like in the PSCo
service territory as well as the benefits of transmission vs. distribution level storage.
• Updated flex reserve study (as previously ordered in Decision C17-0316 in this Proceeding 52),

49
These numbers do not reflect the impact of the TCJA.
50
120-Day Report p. 12.
51
Storage Resource(s) offers a variety of functionality but not necessarily all simultaneously such as frequency regulation,
ramping/spinning reserve, voltage/reactive power support, load following, system peak shaving, load management, excess
wind/solar generation, transmission/distribution deferral, price arbitrage, and backup power.
52
Decision C17-0316, paragraph 145 states "We direct Public Service to complete an updated Flex Reserves Study and file
this study with the Company’s 2019 ERP filing. The updated study shall present a full analysis of empirical data available at

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Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
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• Updated wind integration study incorporating Rush Creek or an advisement that it will not be
possible,
• Solar integration study if additional operational experience has been acquired, and
• Updated ELCC studies as necessary.

In addition to these system studies, Staff suggests that it would be helpful to the Commission for
PSCo to provide a report comparing how the Strategist modeling of resources portrays system operation
compared to how the system actually operates. Staff believes it would help the Commission to
understand how well the current model represents unit capacity factors, integration costs and operation,
ancillary services, etc.

Staff believes that, under any resource portfolio approved by the Commission and particularly
any CEPP, there are additional reporting requirements that should be considered:

• Storage – How is storage actually used on the system? What is the arbitrage value for storage?
What ancillary services and associated benefits does storage provide?
• PTC/DTA – If the Commission approves the CEPP, Staff believes the Company should provide
a report specifically on its actual and forecasted use of the PTCs associated with both Rush
Creek and project W192.
• EAFPM (“Equivalent Availability Factor Performance Mechanism”) – Staff continues to support
a performance mechanism that helps to protect ratepayers from the potential underperformance
of utility owned resources. Staff notes that the EAFPM in place from 2015 to 2017 has now
expired. Staff encourages the Company to include an availability reporting and performance
mechanism for its own baseload and intermediate resources in its next rate case.

In addition to the reports and studies described above, Staff believes the Commission should consider
the following revisions to the ERP Rules:

• Clarify that the Commission has statutory authority to require the analysis of early retirement
scenarios,
• Consider a prohibition on a resource plan with options for differing RAPs, and

that time and shall include a back-cast of historical wind data for verification and modification of the results, as Staff has
suggested here."
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Proceeding 16A-0396E – Staff Comments on PSCo’s 2018 120-Day Report
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• Consider a shorter ERP planning horizon. Shorter-lived eligible energy resources and contracts
are disadvantaged compared to long-term utility owned and fossil fuel resources.

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Proceeding No. 16A-0396E – Appendix A to Staff’s Comments on the 120-Day Report
Highly Confidential Version

APPENDIX A
The figures below provide more detailed illustrations of the annual cost differences between the
Preferred CEPP and the Preferred ERP portfolio by cost category. Data was obtained from the Strategist
Output files provided by the Company. All annual values are in nominal dollars.

VII. Coal Fixed O&M

The fixed O&M costs saved through the early retirement of coal plants are a critical piece of the
Colorado Energy Plan. Figure A-1 shows the difference in these fixed cost savings over time, which
totals an NPV of $125 million in savings for the Preferred CEPP versus the Preferred ERP portfolio.

Figure A1: Coal Fixed Operations and Maintenance (O&M) Savings

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Proceeding No. 16A-0396E – Appendix A to Staff’s Comments on the 120-Day Report
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VIII. Capital Revenue Requirements

Figure A2 shows the difference in on-going capital revenue requirements (investment costs)
exclusive of the capital for new BOT generating assets. Along with fixed O&M costs, retiring
Comanche 1 and 2 early avoids significant capital investment costs. These savings are somewhat offset
by the need for additional transmission upgrades in order to accommodate the larger renewable fleet in
the CEPP. The net result of these cost components is $122 Million in savings for the CEPP. (Note that
amortization of the accelerated depreciation and return on that regulatory asset is directly offset by the
RESA reduction.)

Figure A2: Capital Revenue Requirements Costs and Savings 53

53
LCI is "Load Commutated Inverter" which creates additional flex reserves and MSSC is "Most Severe Single
Contingency" which determines the required operating reserves and reflects the cost incurred to carry additional operating
reserves for portfolios that raise the MSSC.
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Proceeding No. 16A-0396E – Appendix A to Staff’s Comments on the 120-Day Report
Highly Confidential Version

IX. Thermal Generation and Market Purchases

Not surprisingly, the total fuel costs under the CEPP are substantially lower than under the ERP
scenario due to the substantially higher portion of renewable generation. Figure A3 shows the difference
in the thermal energy and operating costs of dispatching coal and gas generation in the two portfolios. It
should be noted that gas CC versus CT fuel costs are approximately offsetting in the two portfolios. 54
The Preferred ERP portfolio has a higher reliance on the 700 MW gas CC built in 2034, thus the CEPP
shows gas CC fuel costs savings relative to the ERP. However, the CEPP has a somewhat higher
reliance on gas CTs with 571 MW more CT capacity added by 2043 in the CEPP vs. the ERP. This
greater CT capacity (along with running those CTs at higher capacity factors), in combination with the
higher heat rate for the CTs, results in substantially higher CT fuel costs for the Preferred CEPP vs. the
Preferred ERP portfolio.

Figure A3: Thermal Generation/Market Purchases

54
But see Section IV.D.2 of Staff’s comments for a discussion of the modeling changes made by the Company that lowered
the operating cost of generic CTs.
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Proceeding No. 16A-0396E – Appendix A to Staff’s Comments on the 120-Day Report
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X. Renewable Energy Costs

In order to achieve all of the fuel savings in the CEPP, a substantial amount needs to be spent on
renewable generation, including the cost of integrating that generation into the system. Figure A4 shows
the difference in these costs for the two portfolios. The additional wind results in Million greater
cost and the additional solar/storage capacity results in $235 Million greater cost for the CEPP. Note that
the Million cost of the BOT wind project reflects Million 55 in ratepayer savings from PTCs
generated from 2021 through 2030. The additional $82 Million in carrying costs of the Deferred Tax
Asset (DTA) are not included in that number (and not graphed in Figure A4), so based on the
Company’s estimation of the DTA carrying costs, the total NPV cost of the BOT wind project is $
Million.56

Figure A4: Renewable Energy Costs

55
This is the value of the stream of PTCs grossed up for taxes.
56
This proposed treatment of PTCs and alternative treatments are discussed further in section IV.C of Staff’s comments. In
contrast to projections for the BOT wind project, the revenue requirements projection for PPA projects may include PTCs or
ITCs, but these savings are "smoothed" by the project bidder.
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Proceeding No. 16A-0396E – Appendix A to Staff’s Comments on the 120-Day Report
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XI. Gas Resource Fixed Costs

The last major category of cost difference is the capital investment needed in future gas thermal
generating assets. The difference in these costs is shown in Figure A5. As was mentioned above, the
CEPP consists of more CT capacity while the ERP portfolio contains more CC capacity. The net impact
of these gas investments is $296 Million in savings for the CEPP. Surplus Capacity Credit 57 creates
another capacity-related cost difference between the portfolios. Overall, the CEPP receives $15 Million
less credit than the ERP portfolio for surplus capacity. This is also shown in Figure A5.

Figure A5: Gas Resources Fixed Costs and Portfolio Surplus Capacity Credit

57
In accordance with the Phase I decision, portfolios receive a $/kW-month credit (based on the cost of a generic CT) for up
to 100 MW of capacity in excess of the total need.
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