BEFORE THE
ARKANSAS PUBLIC SERVICE COMMISSION
IN THE MATTER OF SOUTHWESTERN
)
ELECTRIC POWER COMPANY'S
PETITION FOR A DECLARATORY
ORDER FINDING THAT INSTALLATION
OF ENVXRONMFNTALCONTROLS AT
THX FLINT CREEK POWER PLANT IS
IN THE PUBLIC INTEREST
1
1
)
D O C m T NO. 12-008-U
1
1
SUR-SURREBUTTAL TESTIMONY OF
JITDAH L. ROSE
ON BERALF OF
SOUTHWJ3STERN ELECTRIC P O M R COMPANY
SEPTEMBER 21,2012
-
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE APSC Docket NO.12-OOSU
1
SUR-SURREBUlTAL TESTIMONY OF JUDAH ROSE
September 21,2012
4
1.
INTRODUCTION
5
Q.
WHAT IS THE PURPOSE OF YOUR SUR-SURREBUITAL TESTIMONY?
6
A.
The primary purpose of my sur-surrebuttal testimony is to rebut the surrebuttal
7
testimony of Richard Hahn filed on August 24, 2012 on behalf of the Arkansas
8
Public Service Commission Utilities Division (Staff). Secondarily, I rebut select
9
other parts of the surrebuttal testimony of Sierra Club witness Paul Chernick and
Arkansas Attorney General (AG)witness Kevin Woodruff.
10
11
Q.
HOW IS YOUR SUR-SURREBUTTAL ORGANIZED?
12
A.
My sur-surrebuttal is organized into the following remaining sections:
13
rn
II.
Rebuttal of Mr. Hahn
14
rn
11.1
Mi-. Hahn's Views on the Natural Gas Conversion Option
15
rn
11.2
Mr. Hahn's Views on the Purchase of an Existing Combined Cycle
16
generator in Oklahoma
17
111.
Natural Gas Prices
18
W
IV.
C02 Allowance Prices
19
W
V.
Conclusions
20
11.
REBUTTAL OF MR. HAHN
21
Q.
PLEASE SUMMARIZE MR. HAHN'S TESTIMONY?
22
A.
In his surrebuttal testimony, Mr. Hahn argues that:
23
SWEPCO should consider three natural gaslwind hybrid options
24
addition to the retrofit of Flint Creek: (1) conversion of Flint Creek to a
-
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-OOSU
2
in
1
steam gas plant, (ii) construction of a new natural gas-fired combined
2
cycle on site, and (iii) purchase of an existing natural gas-fired combined
3
cycle in Oklahoma.
4
purchases of either 95 MW or 230 MW of wind generation capacity. The
5
natural gaslwind hybrid options are structured so that the total annual
6
energy production of each natural gaslwind option approximately equals
7
that of the Flint Creek coal plant.
8
0
The three natural gaslwind options each have
SW€PCO should, in Mr. Hahn's view, conclude that the Cumulative
9
Present Worth (CPW) costs of the Flint Creek coal retrofit option and two
10
of the gaslwind options, namely the gas conversionlwind option and the
11
purchase of an existing combined cyclelwind option, are approximately the
12
same.'
13
SWEPCO should use a "broader" decision framework.* The alternative
14
framework should include CPW plus seven qualitative factors: {+I)
the
1s
option's flexibility in adapting to changing circumstances, (2) the level of
16
up front capital investment, (3) the uncertainty or risk associated with that
17
investment, (4) the impact on employment in northwest Arkansas, (5) fuel
18
cost uncertainty, (6) regulatory uncertainty, and (7) total system
19
emissions.
20
The coal retrofit option may be subject to future environmental regulations
21
that would require additional investments or premature retirernenL3
*
Surrebuttal Testimony of Richard 5. Hahn on Behalf of the General Staff of the Arkansas Public Service
Commission, August 24 2012, Docket No 12-008-U, Page 2, Llnes 12-14,Page 5, Line 22 to Page 6,Llne 3, Page 8,
the 22 to Page 9, tlne 7.
Ibid. Page 2, Llne 15. Page 12, Line 14 to Llne 17.
*
3
\bid. Page 3, Ltnes 12-16.
-
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
3
1
SWEPCO should choose the option with the least up-front capital
2
investment.
3
SWEPCO should convert Flint Creek to use natural gas combined with
4
wind because it achieves the goal of minimum capital investment5 Mr.
5
Hahn adds that the natural gas conversion option also maintains reliability,
6
local generation and jobs in northwest Arkansas. Critically, in Mr. Hahn's
7
view, the gas conversion option balances risks while providing flexibi,ity to
8
change as future conditions warrant (emphasis by Mr. Hahn on page 3 of
9
his surrebuttal testimony).6
10
+
The second best option is for SWEPCO to acquire an existing natural gas
11
combined cycle in Oklahoma in combination with incremental wind
12
resources.
13
1L1
Mr. Hahn's Views on the Natural Gas Conversion Option
14
Q.
DO YOU AGREE WITH MR.
OPTION IS THE BEST OPTION AVAILABLE TO SWEPCO?
15
16
HAHN THAT THE NATURAL GAS CONVERSION
A.
No. My conclusion is the exact opposite regarding the natural gas conversion
17
option, namely it is the worst option. This is because it is such an expensive
18
option and carries huge risks. As shown in my direct testimony (see Exhibit I),
19
the natural gas conversion option is by far the most costly optionm8In my Base
20
Case analysis, the natural gas conversion option costs $562 million more
d
on a
Surrebuttal Testimony of Richard S. Hahn on Behalf of the General Staff of the Arkansas Pubtic Service
Commisslon, August 24 2012, Docket No 12-008-U,
Page 3,Line 16-19.
5
/bid. Lines 16-17. See also Page 4, Lines 1 and 2, and Page 16, Line 21 to Page 17, line 2.
h / d , Line 22
'I
hid. Page 16,Lines 21-22.
8
Revised Dlrect Testimony of Judah L Rose on behalf of Southwestern Electric Power Company, June 8 2012,
Docket No 12-008-U, Page 12,Exhibit 3.
'
-
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
4
1
present value basisg in 2010 dollars (or $590 million more in current dollars) than
2
the Flint Creek retrofit. In the High Natural Gas Price Case, the natural gas
3
conversion option costs $934 million ( Z O l O $ ) more than the retrofit option
4
$981 million more in current dollars). There is no scenario among those I
5
examined in which the natural gas conversion is
6
costs. This covers 13 cases, seven of which are in Exhibit 1 and six others are
7
described elsewhere in
8
difference in results, it appears that more than just alternative natural gas and
9
COz allowance price assumptions account for the difference.”
(or
not the option with the highest
my Direct Testimony. In light of the extent of the
10
11
Positive tndtcates cost premlum over Optlon #1 and vice versa
12
13
14
Q.
DOES MR. HAHN’S OWN TESTIMONY SUPPORT HIS CLAIM THAT THE
NATURAL GAS CONVERSION OPTION IS THE LEAST COST OPTION?
15
Present value and cumulatke present worth are equivalent terms.
In addition to the seven scenarios examined and shown in Exhtbit 1, I also examlned 6 others. All of these also
showed the gas conversion as having the hlghest costs for a total of 13 cases. See Page 95 of 112 of Revised
Attachment JLR-2, Exhibit 7-5 for these six additional cases.
10
SUR-SURREBUlTALTESTIMONY OF JUDAH L. ROSE -APSC Docket No, 12-OOSU
5
1
A.
No. Mr. Hahn presents four different analyses in his surrebuttal testimony (see
2
Hahn Figure I-S) including: (ISWEPCO
)
Direct, (2) Staff Direct, (3) Response to
3
APSC-010-1, and (4) SWPECO rebuttal. His preferred option, the natural gas
4
conversion, is not the least cost option in any of these analyses including his
5
revision to Data Request APSC-010-1. The natural gas conversion option has
6
CPW costs that are $236 million to $258 million higher, or in his $IMWh analysis
7
contained in Staff Direct testimony $4.881MWh (or 6.9%) higher, than the least
8
cost option in these analyses.
9
Q.
WHAT ELSE DOES MR. HAHN SAY ABOUT THE OPTIONS?
io
A.
Mr. Hahn states:”
I concluded that acquiring an existing NGCC plant or converting Flint
Creek to burn natural gas were slightly less cost/y than the retrofit option,
but that the differences were small enough such that the economic
11
12
13
comparison was essentially at breakeven.
14
15
16
Q.
DOES MR. HAHN’S OWN TESTIMONY SUPPORT HIS CONCLUSION THAT
17
THE CPW OF THE OPTIONS ARE BREAKEVEN WITH THE RETROFIT
18
OPTION?
19
A.
No.
To highlight the extent to which his claim that the costs of his preferred and
20
other options are breakeven is unsupported, note that SWEPCO’s share of the
21
retrofit capital costs is $268 million in 2010 dollars. Mr. Hahn presents evidence
22
that the cost disadvantage of his preferred option is $236 million to $258 million,
23
which almost equals the $268 million total retrofit capital investment,
24
Q.
DUES MR. HAHN‘S OWN TESTIMONY SUPPORT THE VIEW THAT THE
NATURAL GAS CONVERSION AND RETROFIT ARE BREAKEVEN?
25
I’
Surrebuttal Testlrnony of Richard S. Hahn, op cit, Page S, Line 22 to Page 6,Line 3.
-
SUR-SURREBUlTALTESTIMONY OF JUDAH L, ROSE APSC Docket No. 12-008U
6
I
A.
No, In the analysis based on APSC-010-3, the natural gas conversion option has
2
a cost advantage of $79 million, or 29% of the capital cost of the retrofit.
3
However, he faces other evidence that contradicts this view. For example, the
4
natural gas conversion option is shown in his Exhibit 1-Sto have higher costs
5
than the Flint Creek retrofit in two of the four analyses: $236 million higher costs
6
in the SWEPCO Direct, and $231 million higher costs in the SWEPCO rebuttal.
7
Also,
8
support his view that is so different than SWEPCO’s or mine, Mr. Hahn then
9
claims the options are breakeven andlor the CPW results should not be
10
determinative, and initiates a complex and poorly defined alternative decision
11
process.
12
Q.
WHAT IS YOUR REACTION TO MR. HAHN‘S INCLUSION OF WIND IN SOME
OF HIS PROPOSED OPTIONS?
13
14
my testimony shows that his result appears to be an outlier. Rather than
A.
He treats wind incorrectly and his treatment of wind biases the results in favor of
15
natural gas options, especially in favor of the natural gas conversion option. This
16
can help explain why his CPW for the natural gas conversion is so different from
17
the other evidence.
18
Q.
WHY IS MR. HAHN’S TREATMENT OF WIND INCORRECT?
19
A.
There are five reasons why Mr. Hahn’s wind treatment is a source of bias such
20
that his analysis gives a misleading view of the relative CPW of the options:
21
0
Wind Quantity
-
First, Mr. Hahn creates four options for which the
22
quantity of wind varies between 0 MW and 230 MW. Mr. Hahn presents
23
no rationale for the variation in the quantity of wind included. This is
24
important because in his analysis wind costs less than any other fossil
SUR-SURREBUlTALTESTtMONY OF JUDAH L. ROSE -APSC Docket No. 12-OOSU
7
1
fuel-based generation option.
2
transmission and wind integration cost assumptions, and his analysis
3
methodology which 1 discuss below. By adding wind to the natural gas
4
options, but not to the coal option,12 h e biases the costs of the natural
5
gaslwind options down compared to the coal option. By adding the most
6
wind (230 MW) to the natural gas conversion option, Mr. Hahn creates the
7
largest bias on behalf of natural gas con~ersion.’~Thus, he has
8
effectively engineered an outcome of CPW parity. Furthermore, he offers
9
no rationale for why only 95 MW or 230 MW should b e included in the
10
options. If wind is so inexpensive, why stop at 95 MW or 230 MW? If we
11
accept his views that GO2 allowance prices will be high, there is no
12
rationale provided by Mr. Hahn for not providing an all-wind option. The
13
arbitrary determination of the wind quantity invalidates the use of his
14
analysis because it misleadingly helps to create what Mr. Hahn believes to
15
be a CPW breakeven situation among the options. This arbitrary design
16
of his options helps explain his opposite conclusion from mine, Le., why
17
his preferred option is my least preferred.
18
Wind and the PTC
19
component of his natural gaslwind options is predicated on renewal of the
20
federal Production Tax Credit (PTC).‘4
21
largest subsidy for wind power plants.
22
approximately 120 days and it is highly uncertain, and in ICF’s view,
- Second,
This is due, in part, to his PTC,
Mr. Hahn’s analysis of the renewable
The federal PTC is by far the
The federal PTC expires
12
in
Surrebuttat Testimony of Rlchard S. Hahn on Behalf of the General Staff of the Arkansas Public Service
Commission, August 24 2012, Docket No. 12-0084,Page 4, Lines 13-16.
l3 230 M W of wind for natural gas conversion versus 95 MW for the other natural gas options.
la We infer this from In reviewing hls proposed price for a long term wind suppty option.
-
SUR-SURRE3UTTALTESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-OOSU
a
unlikely, that the federal government will renew the PTC in the near-term.
The opposition to the federa! PTC is much stronger than at any time since
it was first adopted and there is a possibility that the PTC may never be
renewed. The absence of the PTC increases the cost of the wind option
5
by approximately 30 to 50 per~ent.’~Mr. Hahn is silent about this risk and
6
its implications, even though he emphasizes adopting a more complex
7
decision framework to account for uncertainty.
8
Other Costs of Wind -Third, Mr. Hahn once again understates the total
9
cost of the wind option by failing to account for the full costs of using wind.
10
Mr. Hahn does not incorporate any meaningful additional transmission
11
costs associated with obtaining wind supply. T h e s e transmission costs
12
include charges for firm service and losses.
13
assumes a 45% capacity factor and a 5% contribution to reserve margin
14
with an average levelized cost of $421MWh, inclusive of transmission.
15
Wind production with 45% capacity factor levels is not available in
16
Arkansas. The wind power plant will need to be located at remote sites in
17
other states that are remote from northwest Arkansas, eg., the Texas
ia
Panhandle. Without transmission from the location of the wind turbines to
19
the northwest Arkansas load pocket, SWEPCO’s northwest Arkansas‘
20
customers are not receiving a product comparable to locally available
21
power.
22
Arkansas load pocket, but nowhere else, the availability of low cost power
23
in remote locations of the Texas Panhandle would be of less value than
1s
For the wind plant, he
For example, were power prices to spike in the northwest
Mr. Hahn’s levellzed average wind cost Is $42/MWh. The PTC Is $22/MWh.
SUR-SURREBUlTAL TESTIMONY OF JUDAH L. ROSE APSC Docket NO. 12-008U
-
9
1
locally available supply. The local supply obviates the need to purchase
2
locally ai high prices while the remote wind earns some off-system sales
3
revenues at low prices. While these off-system sales revenues could be
4
used to provide a partial offset to SWEPCO revenue requirements, the
5
offset is small compared to the savings available from locally produced
6
power.
7
associated with integrating wind.
8
increased total operating reserve capacity in the form of capacity set aside
9
for operators to handle unexpected fluctuations in wind output.
Mr. Hahn also presents no estimate of the additional costs
For example, power systems need
In
10
particular, power systems are likely to need greater amounts of fast-start
11
natural gas generation capacity, which can be costly to purchase.
12
Operators are also likely to need more access to natural gas delivery
13
capability. Mr. Hahn is also silent regarding the recent challenges the
14
Southwest Power Pool is experiencing with wind. According to SPP, the
15
recent increases in wind generation have resulted in "adverse economic
16
and reliability impacts in the SPP region related to manual dispatch of
17
these
18
to charges for unexpected deviations in wind output.
19
Lack of Hourly Analysis
20
Testimony calculates a levelired average $/MWh cost at the plant gate.
21
This methodological approach understates the CPW advantage of coat
22
over natural gashind options, Specifically, his analysis is not hourly and
23
does not take into account the production profiles of his wind and natural
Changes in the treatment of wind by SPP could lead
- Fourth, Mr.
Hahn's analysis in Stars Direct
lGSouthwestPower Pool, Inc., FERC Docket No. ER-12; luty 23,2012, Page 5
SUR-SURREBUTTAL TESTIMONY OF JUDAH 1. ROSE -APSC Docket No. 12-008U
10
1
gas options; therefore, the gaslwind options are presented as equivalent
2
to the coal option when they are not directly comparable using his
3
methodology. In any given hour, there might be more or less output of
4
wind plus natural gas versus coal generation. It is especially likely for
5
there to be more wind during off-peak hours when the value of the output
6
in terms of cost savings is less. The lack of an hourly analysis by Mi-.
7
Hahn also helps explain his bias for the natural gas conversion option.
8
Lack of Integrated Analysis - Fifth, Mr. Hahn’s analysis in Staffs Direct
9
Testimony contains an additional methodological problem that biases the
10
results against coal. Namely, Mr. Hahn does not conduct an integrated
11
analysis of power systems. As noted, he creates options with similar
12
MWhs,and calculates an average levelized cost per MWh. However, h e
13
does not assess the impacts of the options on the power system. An
14
integrated analysis is needed that accounts for the flexibility of the system
15
to respond to a change in available MWh with changes in dispatch,
16
investments, power imports and exports.
17
analysis also helps explain his bias for the natural gas conversion option.
18
Q.
This tack of an integrated
SElTING ASIDE YOUR DISAGREEMENT ON HIS CPW ANALYSfS, DO YOU
19
AGREE WITH MR. HAHN’S FLEXIBILITY ARGUMENT ON BEHALF OF
20
NATURAL GAS CONVERSION?
21
A.
THE
No, I believe his analysis is flawed and, as a result, he overstates the value of the
22
natural gas conversion option. Mr. Hahn recommends that SWEPCO consider
23
four resource options.
24
anticipates that additional information will become available at some unidentified
After SWEPCO chooses one of the options, he
-
SUR-SURREBUITALTESTIMONY OF JUDAH L, ROSE APSC Docket NO. 12-008U
11
1
point in the future.
This information wilt clarify future fuel prices and other
2
matters affecting the decision."
3
then decide what option to pursue, e.g., if natural gas prices are high, pursue
4
coal, or if natural gas prices are low, pursue natural gas options. The approach
S
is flawed because he fails to account for the very high likelihood that the coal
6
option is essentially "use or lose."
7
accounts for the "use or lose" nature of the coal option. Specifically, by the time
8
more information is available there is a very high likelihood that the only practical
9
options are natural gas based options and that coal will be eliminated as an
In Mr. Hahn's view, at that time SWEPCO can
The correct decision framework properly
The NSPS standard renders new coal power plant construction
10
option.
11
effectively impossible, unless one assumes carbon capture and sequestration
12
(CCS) is technically, economically, and legally feasible. Also, new nuclear plants
13
are prohibitively capital intensive, have very long lead times, and also face
14
significant public opposition post-Fukushima. If SWEPCO does not retrofit now,
15
it will likely have no incremental non-gas, non-renewable options for northwest
16
Arkansas and, therefore, limited means to respond to higher natural gas prices
17
and the need for diversification of supply. Put another way, Mr. Hahn is incorrect
18
in his view that Flint Creek can sit unutilized for a few years or operate for a few
19
years using natural gas, and then, when convenient, be retrofit for coal use. This
20
ignores the very high likelihood that the plant will, at that time, be subject to New
21
Source Review (NSR)18, which results in the plant being subject to regulations
22
with the same degree of stringency as those under the proposed NSPS. This
" Mr. Woodruff also expresses a similar view. Surrebuttal Testlmony of Kevin 0. Woodruff on behalf of The
Attorney General, August 24 2012, Docket No. 12-008-U, Page 11.
Under NSR, rnodificatlons that Increase emissions, @.E., going from natural gas to coal generation, subject the
modified source to regulations with the same stringency as NSPS.
*'
-
SUR-SURREBUlTAL TESTIMONY OF JUDAH 1. ROSE APSC Docket No. 12-008U
12
1
makes the coal option impractical as the decision to convert Flint Creek to natural
2
gas becomes an effectively irreversible commitment to natural gas. Acting now
3
to retrofit protects against this risk and provides the last option for coal use in
4
northwest Arkansas. Only owners of existing coal plants have the opportunity to
5
prevent an even greater reliance on natural gas supply, and thereby ensure a
6
more balanced supply portfolio. These owners gained this "use or lose" option
7
by virtue of their customers paying for service from this legacy plant over its
8
decades of operation. SWEPCO shoujd take advantage of the opportunity these
9
payments have provided by protecting this coal option.
10
Q.
ACCOUNTED FOR FUTURE ENVIRONMENTAL REGULATIONS?
11
12
DO YOU AGREE WITH MR. HAHN'S CONCERNS THAT SWEPCO HAS NOT
A.
No. Mr. Hahn's analysis of the risks of environmental regulations is flawed and
Thus, he unnecessarlly adopted an
13
does not reflect recent developments.
14
alternative decision framework that has numerous problems and results in the
15
most costly option being chosen, Specifically:
16
Mr. Hahn claims that there are additional major environmental costs
17
potentially forthcoming for the Flint Creek coal plant after the retrofit. The
18
likelihood of this is very low as the proposed Flint Creek retrofits include
19
state of the art controls for SOz, NOx, particulates, toxics, ash and water.
20
As a result of these expenditures, the plant will become one of the
21
cleanest coal plants in the country. Mr. Hahn neither identifies additional
22
required retrofits nor provides an estimate of the associated costs.
23
The only item MF.Hahn specifically identifies as a future new regulation is
24
CO2 controls on existing plants. SWEPCO's economic analysis accounts
-
SUR-SURREBUlTALTESTIMONY OF JUDAH L. ROSE APSC Docket No, 12-OOSU
13
1
for the potential of CO;!regulations on existing power plants with a $Iton
2
allowance price. Not only does h e assume a high GO2 allowance price,
3
Mr. Hahn also suggests that all US. coal plants will be forced to retire.
4
Mr. Hahn supports his view on the retirement of existing plants by using a
quote from an AEP representative who says there is a risk that the
proposed GHG NSPS for new plants and modified sources could be
applied to existing plants like Flint Creek. In EPA's own words and
emphasis, the proposed NSPS would not apply to existing plants:
'The proposed rule would apply only to a new fossit-fuel-fired
electric
utility generating units (EGUS) (underline in the original) 19n
9
10
11
Furthermore, NSPS has never been applied to existing units dating back
12
to its enactment in 1970. Also, it seems to be unreasonable to give weight
13
to a view that would result in the shut-down of all US,coal plants. There
14
are approximately 325,000 MW of coal power plants in the US. and the
15
fleet is by far the largest source of electrical energy in the U.S. It would be
16
impractical to implement a replacement of the entire U.S. coal fleet, and
17
unreasonable to base a decision on such an eventuality.
18
e
Mr. Hahn exaggerates the potential for COz controls on existing coal-fired
19
power plants by ignoring recent developments.
20
legislation was decisively rejected in 2010 even though there was a
21
Democratic President in favor, a Democratically controlled US. House of
22
Representatives in favor and 60 Democratic votes in the U.S. Senate.
l9 http:/www.epa.gov/carbonpolludonstand~rds/
-
COz cap and trade
SUR-SURREBUTTALTESTIMONY OF JUDAH 1. ROSE APSC Docket No. 12-008U
14
1
This outcome diminishes the likelihood of $/ton C02 controls on existing
2
coal plants.
3
a
Mr. Hahn's use of ICF's C02 allowance price forecast is incorrect. Mr.
4
Hahn adopts an ICF forecast of COZ allowance prices that would prevail
5
as a resuft of a specific cap and trade program. However, ICF believes
6
that there is a high likelihood {Le., roughly 50% chance) that there wilt be
7
no COZ $Iton controls on existing plants because of such factors as the
8
failure in 2010 to legislate Con controls discussed above. Accordingly,
9
ICF has decreased the $Iton price of this forecast roughly in half.
Mr.
10
Hahn does not make the 50% reduction, producing a Base Case C02
11
price forecast applicabje to existing coal plants that is roughly twice the
12
ICF level. If h e relies on ICF for COZassessments, h e should fully rely on
13
it.
14
Mr. Hahn claims to consider C02 sensitivities but bases his quantitative
15
conclusion of CPW parity between the options on base cases only. In
16
spite of his emphasis on uncertainty, his Base Case forecast of CO2
17
ignores the uncertainty regarding future CO2 regulations for existing plants
18
by effectively assuming there is a 100% chance of a $/ton COz program.
19
Q.
CONVERSION IS NOT ECONOMIC?
20
21
WHAT OTHER EVIDENCE IS THERE THAT THE NATURAL GAS
A.
The few coal plants being converted to natural gas-fired steam units are in very
The few plants undergoing this
22
different circumstances than Flint Creek.
23
conversion are much smaller than Flint Creek and, as a consequence, have
24
prohibitively high retrofit costs. These plants are also older and have higher
-
SUR-SWRREBUTTALTESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
15
1
delivered coal costs than Flint Creek. The natural gas conversion option is not
2
attractive because it results in a high emitting, inefficient, and inflexible power
3
plant that exposes customers to extremely high costs in the event that natural
4
gas prices are high.
5
Q.
MINIMIZED?
6
7
WHAT ABOUT MR. HAHN’S VIEW THAT CAPITAL COSTS SHOULD BE
A.
Mr. Hahn bases his claim that the conversion option is attractive on his assertion
8
that it minimizes the level of capital investment. Not only is this the incorrect
9
approach for the reasons noted above, he is selective about his concern
10
regarding undertaking cost obligations that cannot be reversed; for example, he
11
considers capital costs but not other irreversible costs like Power Purchase
12
Agreements (PPAs). This causes him to bias his analysis against the Flint Creek
13
retrofit option.
14
decreases flexibility, but he considers as reasonable similar or more expensive
15
irretrievable cost outlays. Most notably, he recommends signing long-term PPAs
16
with wind facilities that contain take or pay provisions. For example, the $/kW
17
costs of his wind option plus natural gas conversion costs are higher than the
18
retrofit option when the fixed costs of the wind PPA are converted to a present
19
value and added to those of the conversion (including the capital costs for adding
20
Selective Catalytic Reduction and other systems for the natural gas conversion).
21
The fixed cost premium of natural gas conversion over the retrofit could b e even
22
higher. For example, the wind fixed costs would increase 30 to 60 percent if the
23
PTC is not extended. This unequal treatment of similarly irreversible obligations
24
is not justified. Future events could make any irreversible commitment ex-post
In his view, making Flint Creek retrofit capital investments
-
SUR-SURREBUlTALTESTlMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
16
1
appear wrong, Thus, Mr. Hahn ignores the potential that his preferred option
2
could also be inflexible.
3
Q.
DECISION FRAMEWORK?
4
5
WHAT ELSE IS TROUBLING ABOUT MR. HAHN'S PROPOSED NEW
A.
Consumers prefer stable rates, all else equal. Coal use results in greater year-
6
by-year stability of rates. This issue is ignored by Mr. Hahn even though he
7
emphasizes the need to address uncertainty, and goes to great lengths to
8
introduce a broader decision making approach that goes beyond the CPW
9
measure. This failure is surprising because in my direct testimony, I also argued
10
that other factors than just CPW should be considered. Specifically, I argued that
11
because of the greater annual volatility of costs associated with natural gas
12
compared to coal, SWEPCO should prefer coal options, all else equal.
13
supported the claim of greater volatility for natural gas relative to coal by
14
referencing it as the reason why long-term natural gas contracts and use of
15
NYMEX futures are not an option, but long-term coal transportation contracts are
16
common. I emphasized that current natural gas prices are evidence of continued
17
volatility; natural gas prices are in a temporary trough. Higher prices occur when
18
demand exceeds supply, in part, because demand is relatively inelastic. That is,
19
even when prices rise, consumers continue to heat their homes with natural gas,
20
use electricity generated by natural gas, etc. 1 also emphasized that the CPW
21
measure does not capture this impact, but that year-by-year price, and hence,
22
rate volatility should be included in the analysis, When the issue of rate volatility
23
is included, it reinforces the desirability of the Flint Creek retrofit.
24
11.2
Mr. Hahn's View on Purchasinq an Existing Combined Cycle in Oklahoma
-
SUR-SURREBUTTAL TESTIMONY OFJUDAH 1. ROSE APSC Docket No. 12-008U
17
I
1
Q.
EXISTING COMBINED CYCLE OPTION?
2
3
WHAT DOES MR. HAHN CONCLUDE REGARDING THE PURCHASE OF AN
A.
Mr. Hahn concludes that the purchase of an existing combined cycle combined
4
with 95 MW of wind is the second best option and is also preferred to the Flint
5
Creek coal retrofit. The purchase of the existing combined cycle option is ranked
6
behind the natural gas conversion because it has higher capital costs.
7
Q.
WHAT ARE THE KEY ASSUMPTIONS MR. HAHN MAKES IN ARRIVING AT
8
THIS CONCLUSION ABOUT AN
9
OKLAHOMA?
10
A.
EXISTING COMBINED
CYCLE
IN
He assumes an existing 250 MW combined cycle plant is available in the Public
11
Sewice of Oklahoma (PSO) territory at a cost of $6001kW in 2016 dollars,
12
inclusive of transmission cost.
13
obtained and the purchase can be performed in a timely manner.
14
Q.
He also assumes that transmission can be
DO YOU AGREE WITH MR. HAHN THAT PURCHASING A COMBINED
15
CYCLE IN OKLAHOMA FOR A PRICE OF $ S O O K W IS MORE ECONOMIC
16
THAT THE FLINT CREEK RETROFIT?
17
A.
No. In my direct testimony, I did not analyze the option of a purchase of an
However, in preparation of my sur-surrebuttal I did
18
existing combined cycle.
19
analyze this option assuming transmission is in place and that a combined cycle
20
can
21
combined cycle is inferior on a present value basis to the Flint Creek coal retrofit
22
(not including supplementary wind for either option) by $177 million.
23
Q.
be purchased for $6001kW.
I conclude that purchasing the existing
ARE THERE OTHER REASONS FOR PREFERRING THE RETROFIT?
-
SUR-SURREBUITAL TESTIMONY OFJUDAH 1. ROSE APSC Docket NO.12-008U
18
I
A.
Yes,
The costs of the existing combined cycle located in PSO territory, including
2
sufficient costs for transmission, are higher than $600/kW in the view of
3
SWEPCO. To the extent this is correct the advantage of the Flint Creek retrofit
4
over the purchase of an existing combined cycle in Oklahoma would be greater
5
than $177 million. There may also be issues related to the feasibility of timely
6
implementation of transmission and the purchase. Also, as noted, the year-by-
7
year volatility of natural gas combined with the “use or lose” nature of the coal
8
option, discussed above, favors the Flint Creek retrofit.
9
Q.
EXISTING COMBINED CYCLE?
10
11
WHY ELSE DO YOU HAVE A DIFFERENT VIEW ON PURCHASING AN
A.
I do not believe that the Flint Creek retrofit and the purchase of the existing
12
combined cycles are mutually exclusive; it might be possible to do both.
13
SWEPCO can find a low cost natural gas combined cycle plant that can be
14
purchased and its power delivered economically and reliably, there may be a
15
need for such capacity even after the Flint Creek retrofit. SWEPCO plans to
16
retire 528 MW of coal capacity at Welsh in 2015 and 233 MW of gas steam
17
power plants by 2023, and anticipates peak load growth over this period. It might
18
be possible for the existing natural gas plant to be used to meet SWEPCO’s
19
need for additional capacity. If so, it might be possible to accommodate this
20
existing capacity without losing the Flint Creek coal power plant. The carrying
21
cost of an early purchase of capacity might be offset by savings. Furthermore, it
22
allows for more time to consider the existing combined cycle option including
23
transmission impacts, whether the plant is in fact available, and under what terms
24
and conditions. This option can be especially attractive because, as noted,
-
SUR-SURREBUlTALTESTlMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
19
If
1
natural gas use and reliance will naturally increase over time as natural gas and
2
renewable plants are the primary options available for incremental capacity
3
expansion to meet growing demand. SWEPCO will be no exception to this
4
anticipated trend. AI! analysis in this case indicates that all future SWEPCO non-
5
renewable capacity will be natural gas-fired. However, it may be possible to both
6
purchase an existing combined cycle and retrofit Flint Creek, thereby allowing
7
SWEPCO to use coal and take advantage of the assumed temporary opportunity
a
to purchase combined cycle capacity at less than replacement cost.
9
111.
Natural Gas Prices
10
Q.
WHAT IS YOUR VIEW OF NYMEX NATURAL GAS FUTURES CONTRACTS?
11
A.
NYMEX contracts are useful in hedging against commodity price uncertainty in
12
the near-term. However, the market is not robust enough in the long-term to
13
provide clarity about long-term price trends.
14
Q.
MR. CHERNICK SAY ABOUT ICF NATURAL GAS PRICE
FORECASTS?
15
16
WHAT DOES
A.
MF.Chernick makes the following claims:''
Futures prices represent actual prices being paid with real money, while
forecasts are simply the results ofmodels, whose authors do not need to bet
their own money (or money they are entrusted with) on the accuracy of their
projections.
17
18
19
20
21
Were the N Y MEX prices known to be significantlybiased estimators of future
prices, gas users could save money, and investors could make money, by hefting
against them.
22
23
24
25
The NYMEX fotward prices are real prices at which SWEPCO can buy power,
while the forecasts are just numbers on paper.
26
27
28
''Rebuttal Testimony of Paul Chernick On Behalf of The Sierra Club, August 24 2012, Docket No. 12-008-U,, Page 5,
Lines 8-16.
The NYMEX fonvard prlces are for natural gas even though Mr. Chernick indicates that they are for power.
21
-
SUR-SURREBUITALTESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
20
1
Q.
WHAT IS YOUR REACTION?
2
A.
Mr. Chernick's claim that N Y M B prices are accurate predictors of long-term
3
future prices because they involve "real"money is inaccurate, ignores my rebuttal
4
testimony on this specific issue, and, most importantly, fundamentally
5
misconstrues the risks associated with the use of natural gas. As I stated in my
6
rebuttal testimony, little or no money is involved in NYMEX natural gas futures
7
prices beginning in 2016 and thereafter. As shown in Exhibit 2, for 2020 delivery
8
the actual number of NYMEX transactions is 0.00024 percent of the 2012 level.
9
There are no post-2020 transactions.22
"There are small amounts of open interest whlch is akIn to unfilled blds.
-
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE APSC Docket No. 12-008U
21
I
Exhibit 2
Number of Futures Contracts Traded aer Month for Delivery -January to September 2012 Trading*
Year1
Month
I
I
2012
1
I
2013
2016
2017
2018
2019
2020
549
34
17
91
80
874
632
2
i
36,935
3,406
610
1
2
32,918
975
285
12
29,034
1,148
'I64
39,022
937
33,668
265,470
2014
2015
22,787
2,023
29,506
985
23,777
1,755
17,823
2021 and
Thereafter
4
0
46
0
6
9
0
22
7
3
0
151
127
4
1,602
69
19
2
-
13,705
3,079
249
53
99
4
0
0
I
62,254,825
6,859,909
'Reflects d a b as of September 14,2012.
SUR-SURREBUTTAL TESTIMONY OF JUDAH L. ROSE -APSC Docket No. 12-008U
22
150
0
Q.
WHY IS NYMEX NOT USED LONG-TERM?
A.
NYMEX is not used long-term in large part because of the potential for a
catastrophic collateral call.
Natural gas transactions have rnark-to-market
collateral requirements which, in turn, are necessary due to the high volatility of
5
natural gas prices and the concerns that parties will not be able to cover their
6
obligations. Accordingly, SWEPCO cannot use NYM EX to hedge long-term
7
supply, nor can most users.
8
NYMEX hedging is possible for long-term consumption.
9
Q.
CAN YOU ELABORATE ON HOW SMALL THE VOLUME IN THE NYMEX
MARKET IS?
10
11
It is fundamentally misleading to believe that
A.
Yes. The Henry Hub NYMEX contract is far a volume of 10,000MMBtu. Thus,
12
the 150 NYMEX gas futures contracts traded for 2020 delivery would supply
13
natural gas roughly equal to 0.005% of expected North American natural gas
14
usage. This means the entire NYMEX market volume traded for 2020 delivery is
15
an infinitesimal fraction of market needs. In later years, the NYMEX volume is
16
even lower, Le., zero. This is hardly the betting with real money that justifies Mr.
17
Chernick's conclusion that it is not necessary to analyze the natural gas market
18
using an accepted modeling tool, to state assumptions, and to have an integrated
19
forecast.
20
Q.
WHAT EVIDENCE BEYOND THE CLAIM THAT REAL MONEY IS INVOLVED
21
DOES MR. CHERNlCK BASE HIS CLAIM THAT FORECASTS SHOULD NOT
22
BE RELIED ON?
23
24
A.
He reviews U.S. EIA forecasts of natural gas prices from 1994 to 2007. These
forecasts show that when natural gas prices were low, and rising, the forecasts
-
SUR-SURREBUITALTESTIMONY OF JUDAH L, ROSE APSC Docket No. 12-008U
23
He then shows forecasts of AEP that were too high when
1
were too low.
2
were high and decreasing. He also quibbles with my evidence showing the fact
3
that futures generally reflect the current market price, but shows no cogent
4
evidence refuting the point. Rather than supporting his view that forecasting and
5
analysis of the market should be eschewed in favor of relying on NYMEX futures,
6
and that natural gas prices will be low, Mr. Chernick actually highlights a key risk
7
with natural gas generation options. Namely, when the market price for natural
8
gas is low, natural gas prices have turned out later to be higher than expected
9
and very volatile. That is the view I have expressed, Le,, natural gas prices are
10
low and future prices will be higher and more volatile than many observers
11
expect, thereby supporting the retrofit of Flint Creek.
12
Q.
WHY ELSE DO YOU REJECT MR. CHERNICK'S DISMISSAL OF THE
IMPORTANCE OF DETAILED ANALYSIS OF THE NATURAL GAS MARKET?
13
14
prices
A.
This is not the first time the issue of how to approach gas forecasting has been
A May 2010 study for the National
15
addressed by US state utility regulators.
16
Regulatory Research Institute (NRRI) is particularly relevant to the issue raised
17
by Mr. Chernick. NRRl was founded
in 1976 by the National Association of
18
RegulatoFy Commissioners (NARUC).
NRRl's by-laws were approved by the
19
NARUC Board's Executive Committee.
20
majority of NRRl's Board. The May NRRl 2010
21
detailed assessment of natural gas prices is critical. Specifically,the NRRl report
22
states:
State commissioners constitute a
supports my view that a
=Looking Before Leaping: Are Your Utility's Gas Prlce Forecasts Accurate, Ken Costello, Principal, NRRI, May 2010
-
SUR-SURREBUlTALTESTlMONY OF JUOAH 1. ROSE APSC Docket No. 12-008U
24
Reliable forecasts require a sound analytical framework that
quantitatively relates price to different predictors. 24
1
2
3
4
Regulators should require a utility
to provide full documenfation
nafural gas price forecast, including the analjdical framework
and data used, the assumptions made, and the explicit or implicit
relationship between price and important predictors o f price. (Bold in
original) These predictors can include economic growth, quantity of gasfired generation capacity, the avaiiabitity and cost of domestic gas
supplies, and natural gas supply- and demand-price elasticities.25
o f its
5
6
7
8
9
10
11
In presenting its forecast, 8 utility should file sufficient documentation to
permit a thorough review
by the regulaior and stakeholders of the
forecasting methodology, data sources, assumptjons for the predictors,
and the past forecasting record of the utility. Only then can the regulator
test the validiiy of the forecast.
12
13
14
1s
’’
16
17
18
19
Q.
A.
Futures pn’ces are good only as a shod-term forecast; the vast majody of
NYMEX contracts settle within the following twelve months. The historical
pattern of nefora1gas futures prices exhibits high wIati/ity, even on a month-tomonth basis. 27
22
24
2s
26
Q.
VOLATILITY OF NATURAL GAS PRICES?
28
29
CONTRADICT MR. CHERNICK’S VIEW ON RELYING ON
Yes. The report states:
23
27
THE NRRI STUDY
NYMEX FUTURES?
20
21
DOES
A.
Yes. The report states:
Natural gas prices have exhibikd wide fluctuations since the beginning of this
century, with particularly pronounced price variability during cerfain sub-periods
such as the middle of 2008 to the present. Partially because of the weak shortrun response of gas supply and demand to price changes, even moderate
changes in market conditions can produce large fluctuations in price.
30
31
32
33
34
’’
35
24
Ibid. Page lil
Ibid. Page Iv
“Ibid. Page 12
27 Looking Before Leaping: Are Your Utllity‘s Gas Price Forecasts Accurate, Ken Costello, Principal, NRRI, May 2010.,
Page 6
hid. Page 18
28
-
SUR-SURREBUITALTESTIMONY OF JUDAH L. ROSE APSC Docket NO. 12-OOSU
25
1
DOES THE NRRl STUDY ALSO CONTRADICT
Q.
TESTIMONY ON NATURAL GAS PRICES?
2
3
MR. HAHN’S SURREBUTTAL
Yes. Mr. Hahn presents a forecast of natural gas prices by CERA taken from a
A.
4
Centerpoint Energy Gas Procurement Plan. In contradiction to the NRRl study, no
5
documentation is pro~ided.~’
6
IV.
7
Q,
WHAT DOES MR. HAHN SAY ABOUT COz ALLOWANCE PRICES?
8
A.
Mr. Hahn states that ICF C o n allowance priceslforecasts are too low because the
9
COn allowance price is not high enough to change the dispatch order of
10
generati~n.~’He supports his view by comparing Flint Creek’s dispatch costs to
11
those of a new natural gas combined cycle under GO2 regulations. In Mr. Hahn’s
12
view, his C02 prices are reasonable because they decrease the dispatch of Flint
13
Creek and increase the dispatch of the new combined cycle. Also, in his view,
14
ICF’s allowance price forecasts are not reasonable because Flint Creek’s
15
dispatch is high and unaffected by COz allowance costs when ICF‘s forecast is
16
used.
17
Q.
WHAT IS YOUR REACTION?
18
A.
I disagree, The effects of a particular COz price must be assessed based on
19
integrated nation-wide modeling, not on an assessment of Flint Creek alone.
20
This is because Flint Creek is not representative of the entire set of COn emitters.
21
Flint Creek is a very competitive coal plant with competitive variable costs
22
compared to other emitters. As such, it is much more difficult to displace Flint
~-
a Ibld, Page 20.
Surrebuttal Testimony of Richard S. Hahn on Behalf of the General Staff of the Arkansas Public Service
Commission, August 24 2012, Docket No. 12-008-U, Page 22-23
30
SUR-SURREBUlTALTfSTlMONY
OFJUDAH 1, ROSE - APSC Docket No. 12-008U
26
1
Creek (and alter its dispatch) compared to other plants, including higher variable
2
cost coal plants. The impact of COn prices needs to be assessed simultaneously
3
for all plants, regions, decisions, and sectors.
4
investments, transmission, etc, To make an assessment on Flint Creek alone
5
biases the analysis.
This includes dispatch,
6
V.
Conclusions
7
Q.
PLEASE SUMMARIZE YOUR CONCLUSIONS.
8
A.
Mr. Hahn believes the best option for SWEPCO is the natural gas conversion
9
option.
In contrast, t believe it is the worst option because it is a hugely
My sur-surrebuttal testimony
10
expensive option that carries significant risks.
11
highlights some of the reasons 1 believe Mr. Hahn's conclusion is wrong,
12
including:
13
a
Mr. Hahn makes the claim that the natural gas conversion option exists on
14
a breakeven basis with the coal and his other natural gas options, but his
15
claim is unsupported by the evidence. In all analyses, the conversion
16
option is not least cost, and the CPW premium of the natural gas
17
conversion is large compared to the absolute capital cost of the retrofit;
18
Mi-. Hahn makes the claim that the natural gas conversion and the coal
19
retrofit have breakeven CPW. However, this
20
analyses and appears to reflect several problems in his approach
21
addition to unreasonable natural gas prices and COz price assumptions.
22
Mr. Hahn constructs natural gas options with varying amounts of wind, but
23
excludes wind from his coal option. This biases the CPW results against
-
is at variance with other
SUR-SURREBUTTALTESTIMONY OF JUDAH 1. ROSE APSC Docket No. 12-008U
27
in
1
coal and in favor of the natural gas options. This bias is especially large in
2
favor of the natural gas conversion option;
3
Mr. Hahn uses incorrect assumptions and methodologies that exaggerate
4
the attractiveness of wind and reinforce the CPW bias;
S
Mr. Hahn makes inappropriate environmental assumptions, including
6
flawed and exaggerated treatment of COn allowance prices, NSPS, and
7
the potential for other environmental regulations;
8
Mr. Hahn adopts a poorly defined and inappropriate decision framework
9
that features an excessive emphasis on minimizing initial capital
10
investment costs;
11
Mr. Hahn fails to recognize that the coal option is effectively "use or lose";
12
and
13
Mr. Hahn fails to recognize the potential that the retrofit and purchasing an
14
existing plant in Oklahoma are not necessarily mutually exclusive. Thus,
15
while I disagree that purchasing an existing combined cycle in Oklahoma
16
is preferred over the coal retrofit option, it might play a role
17
other SWEPCO needs if transmission and other issues, such as added
18
carrying costs, can be resolved.
in meeting
19
I also believe Mr. Chernick's and Mr. Hahn's views on natural gas prices are
20
unsupported and incorrect.
21
Q.
DOES THIS COMPLETE YOUR SUR-SURREBUlTAL TESTIMONY?
22
A.
Yes.
SUR-SURREBUlTAL TESTIMONY OF JUDAH L, ROSE -APSC Docket No. 12-008U
28