BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * ) ) ) ) ) ) DIRECT TESTIMONY AND EXHIBITS OF SUSAN ARIGONI BEHALF OF

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * IN THE MATTER OF THE APPLICATION OF PUBLIC SERVICE COMPANY OF COLORADO FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE HAYDEN EMISSIONS CONTROL PROJECT DOCKET NO. A- E DIRECT TESTIMONY AND EXHIBITS OF SUSAN ARIGONI ON BEHALF OF PUBLIC SERVICE COMPANY OF COLORADO November 1, 0

2 LIST OF EXHIBITS Exhibit No. SA-1 Kinder Morgan Press Release

3 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * IN THE MATTER OF THE APPLICATION OF PUBLIC SERVICE COMPANY OF COLORADO FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE HAYDEN EMISSIONS CONTROL PROJECT DOCKET NO. A- E DIRECT TESTIMONY AND EXHIBITS OF SUSAN ARIGONI I. INTRODUCTION AND QUALIFICATIONS Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Susan Arigoni. My business address is 0 Larimer, Denver, Colorado 00. Q. BY WHOM ARE YOU EMPLOYED AND WHAT IS YOUR POSITION? A. I am employed by Xcel Energy Services Inc., a wholly owned subsidiary of Xcel Energy Inc., the parent company of Public Service Company of Colorado. My job title is Vice President, Fuels. Q. WHOM ARE YOU REPRESENTING IN THIS PROCEEDING? A. I am testifying on behalf of Public Service Company of Colorado ( Public Service or Company. Q. HAVE YOU INCLUDED A DESCRIPTION OF YOUR QUALIFICATIONS, DUTIES AND RESPONSIBILITIES? 1

4 A. Yes. A description of my qualifications, duties and responsibilities is included as Attachment A. II. PURPOSE OF TESTIMONY Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY IN THIS PROCEEDING? A. The purpose of my testimony is to describe coal-supply issues related to the Hayden Station ( Hayden, describe how prior forecasts of delivered prices for Hayden were developed, and how prices negotiated in a recent coal purchase for Hayden differ from the forecast III. HAYDEN STATION COAL OVERVIEW Q. PLEASE PROVIDE AN OVERVIEW OF THE COAL REQUIREMENTS FOR HAYDEN. A. Hayden is a MW, two-unit station that nominally requires about 1. million tons per year of coal. The current six-year contract with Peabody for supply to Hayden terminates at the end of 0. With the resolution of Clean Air Clean Jobs Act ( CACJA plans and the life extension of the plant as a result of the Commission s approval of Public Service s plans for Hayden, the Company sought to contract for new coal supply beyond 0 for Hayden. Public Service jointly owns Hayden with two other utilities: PacifiCorp and Salt River Project Agricultural and Irrigation and Power District ( SRP. Although Public Service is the Operating Agent for Hayden, major decisions, like coal supply and the installation of emissions controls have been jointly

5 made by the participants. Therefore, Public Service has worked with SRP and PacifiCorp to negotiate the coal-supply arrangements for Hayden. Q. BRIEFLY SUMMARIZE HISTORIC COAL PROCUREMENT FOR HAYDEN. A. Hayden has had most of its coal supplied over the years from nearby mines. For most of the plant s life, coal was supplied from the Seneca Mine. Since that mine closed, Hayden has been supplied from Peabody Energy s Twentymile coal mine operations ( Twentymile. Twentymile and the Seneca Mine before it are quite close to Hayden, which has provided a logical and synergistic relationship between the coal mines and Hayden IV. HAYDEN COAL COSTS Q. WHAT ASSUMPTIONS REGARDING COAL AVAILABILITY AND COSTS FOR HAYDEN WERE OF PARTICULAR IMPORTANCE IN THE CACJA ANALYSIS? A. Coal costs utilized in scenarios for the CACJA plan were developed in early to mid 0. The focus was on Colorado coal because the primary plants that are part of the CACJA plan burn Colorado coal. Relative to Montana and Wyoming Powder River Basin ( PRB coal production, the volume of Colorado coal production is small ( million tons v. million tons in 0. Public Service plants burning Colorado coal are primarily served (and entirely served in the case of Hayden with coal from Twentymile, and that mine was expected to be played out sometime in 01. In 0, Peabody was evaluating opening a new mine ( Sage Creek, but had not yet committed to opening it. Another area coal mine, Rio Tinto s Colowyo Mine,

6 was for sale, and Rio Tinto had announced it did not intend to expand production at that mine after current reserves are exhausted in 01. Twentymile is miles by rail from Hayden, and Colowyo is 0 miles by rail from Hayden, making those mines the most economic options for coal supply to the plant. Other coal mines in Colorado that could supply Hayden are located in the North Fork Valley, which is southwest of Glenwood Springs and more than miles by rail to Hayden. North Fork Valley mines include Arch Coal s West Elk Mine, which produced approximately million tons in 0, and Oxbow s Elk Creek Mine, which produced million tons in 0. Coal from both of those mines has been purchased in the past for Cherokee and Valmont stations, but not for Hayden. Twentymile and the North Fork Valley mines (including West Elk and Elk Creek are underground mines. Scenarios developed for CACJA included various quantity reductions of coal for Cherokee and Valmont. All CACJA scenarios had Hayden running on Colorado coal with the installation of selective catalytic reduction devices ( SCRs on both units. The base case assumed Cherokee and Valmont would continue on coal with the installation of emission controls necessary to achieve required NOx-emissions reductions. Thus, the base case assumed no change to demand for Colorado coal. However, the case that was approved by the Commission includes the cessation of coal use by the end of 01 by the Cherokee and Valmont units. Q. WERE ANY SPECIAL STUDIES PERFORMED TO ESTIMATE COAL

7 COSTS FOR THE CACJA ANALYSIS PERFORMED BY PUBLIC SERVICE? A. Yes. Wood Mackenzie, a research and consulting company under retainer to Public Service, was asked to do a study to assess the effect of reduced demand on the price of Colorado coal. That study was completed in June 0 and was included as an exhibit in the direct testimony of Tim Sheesley in the CACJA plan filing with the Commission in August 0. Q. IS THAT STUDY STILL RELEVENT? A. Yes. It is important for the Commission to understand the methodology and scope of the study to put in perspective the reasonableness of the continued operation of Hayden on coal and the installation of SCRs at Hayden 1 and. Q. PLEASE SUMMARIZE THE METHODOLOGY USED BY WOOD MACKENZIE TO PREDICT COAL PRICES IN THIS SPECIAL STUDY. A. For forecasting coal prices, Wood Mackenzie used its proprietary linear programming model to develop a base forecast from which it can make adjustments for current market conditions and run scenarios around that adjusted output. For the special study, Wood Mackenzie used its adjusted forecast for Colorado coal and ran scenarios based on various reductions in Colorado coal demand caused by the retirement of Public Service s different 0 coal plants. The reduced demand curves were compared to Wood 1 Mackenzie s proprietary cost (supply curve to derive new forecast prices, which were lower because mines with costs lower on the cost curve set the market-clearing price. The primary impact was on lower-heat-content

8 Colorado coals, which are the Colorado coals Public Service primarily buys. Q. HOW WERE THE SCENARIOS DEVELOPED FOR THE CACJA ANALYSIS USED BY WOOD MACKENZIE? A. The scenarios developed for modeling in the CACJA plan were used by Wood Mackenzie in its model, and the coal prices derived by the model were used in the CACJA model runs. Coal cost for Hayden was the price derived by the Wood Mackenzie model. The Wood Mackenzie study covered the period 0-01 and covered the effect of reduced demand on price. The demand reduction associated with the elimination of Cherokee and Valmont demand was established at ~ million tons. Uncertainty about Peabody s decision to continue production after the Twentymile reserves were anticipated to be exhausted and the uncertain future of the Colowyo mine, owned by Rio Tinto, was recognized in the study. However, the base case assumed Twentymile capacity would be replaced by the Sage Creek Mine. Q. HOW DID THE MODEL RESULTS REFLECT THE DEMAND REDUCTION? A. The model predicted that with a demand reduction of ~ million tons magnitude, a price reduction of $-$1/ton could be expected if the mine and its replacement capacity were to continue to operate. Prices are market clearing prices and are estimates of prices for one-year contract sales. In the model, market clearing prices are limited on the low side to the price at which continued operation of the mine is unprofitable.

9 Q. HOW WERE PRICES DERIVED BEYOND 01 FOR MODELING IN THE CACJA STUDIES PERFORMED BY PUBLIC SERVICE? A. Since Wood Mackenzie s study only went through 01, prices for Hayden beyond then were escalated from the 01 price for the life of the plant in Public Service s Strategist modeling. Q. WHAT ABOUT TRANSPORTATION COSTS? A. Transportation costs for Hayden were estimated assuming rail delivery of coal beginning in 01. However, a contract for rail had yet to be negotiated with the Union Pacific Railroad ( UP, the only rail-delivery option available for the Plant. Q. WHEN YOU BEGAN SEEKING A REPLACEMENT SUPPLY FOR THE EXPIRING PEABODY CONTRACT FOR HAYDEN, WHAT WERE YOUR KEY CONSIDERATIONS? A. Reliable long-term supply and delivered price were identified as the two most important attributes of a supply agreement. Because supply of Colorado coal is limited for Hayden and with the CACJA-approved plan for Hayden resulting in a long life for the plant, we ranked long-term supply as the number one priority. Q. HOW DID YOU ASSESS THE MARKET FOR COAL FOR HAYDEN? A. Public Service recognized the primary source of Colorado coal for Hayden was likely to be Twentymile because it is significantly closer to Hayden than the closest other mine with available coal ( miles by rail versus miles by rail; therefore, the transportation costs are much lower. The practical

10 result is that competing coals would have to be significantly lower priced on a free-on-board ( FOB mine basis to compete with Twentymile. With limited supply options for Hayden, a primary focus early on was to exhaust all possible supply options besides Peabody. Colowyo, owned by Rio Tinto, is the best alternative because it is the only alternative with proximity to Hayden nearly equivalent to Peabody s. Colowyo production is sold out through 01, and production beyond that time will require development of additional reserves. Rio Tinto was contacted with the idea of discussing a coal purchase post 01. However, Rio Tinto was not interested in operating the mine after 01 and investing the capital required to develop additional reserves. Even if Rio Tinto had been interested, Hayden would still have a gap in supply of three or four years from 01 until 01 or 01. With no immediate prospects for Colowyo assets being sold to an entity willing to invest the capital necessary to develop additional reserves, it was clear Colowyo could not be considered a long-term prospect. Even if Colowyo were to be sold, it will take at least two years from the closing of that transaction for Colowyo to ramp up production from.m tons per year. Q. WHAT SUPPLY OPTIONS WERE AVAILABLE AND HOW DID YOU OBTAIN PROPOSALS FROM SUPPLIERS? A. Despite the inherent economic advantage the short transportation distance creates for Twentymile, Public Service solicited proposals for coal supply in the market in January 0. The combination of responses from coal suppliers and the rail pricing indicated Peabody was the lowest priced option,

11 but negotiations over the ensuing months brought the coal pricing down even lower. Q. WERE THERE UNUSUAL CHALLENGES PARTICULAR TO THE HAYDEN PLANT THAT HAD TO BE ADDRESSED IN OBTAINING A RELIABLE, LONG-TERM COAL SUPPLY? A. Yes. Peabody reserves at Twentymile will be exhausted at about the end of 01. However, Peabody has adjacent reserves, called Sage Creek, it is willing to develop but only if it gets a long-term coal sales contract that underpins the significant investment it would take to open those new reserves. The Peabody interests of developing a structure for a long-term contract that would underpin Sage Creek development align with Public Service s need for a long-term, reliable supply to support the long-term operation of the plant. Public Service was able to balance its lack of competitive options with Peabody s interests to achieve a transaction that provides a long-term supply for Hayden. Q. WERE THERE DEVELOPMENTS IN THE COAL MARKET THAT WERE UNKNOWN OR UNEXPECTED BACK IN 0 WHEN COAL PRICES FOR CACJA ANALYSIS WERE ESTIMATED? A. Demand for Colorado coal in domestic markets has continued to be weak. However, producers of Colorado coal, including Peabody, have taken and continue to take steps to export coal in seaborne markets as global coal markets continue to grow. The export demand was not anticipated back in

12 early 0 but it has influenced the price of coal marketed to US customers, including the price negotiated with Peabody for Hayden supply. The US Energy Information Administration ( EIA reported 1. million short tons of exports in 0, and preliminary exports for the first half of 0 total. million short tons. The following chart, based on EIA data, shows the growth in US coal exports in recent years, as interrupted by the world-wide recession in 00-. US Coal Exports (Metallurgical and Steam Coals,000 0,000 Short Tons (000s 0,000 0,000 0,000 0, YTD June 0 Annualized As shown by the above chart, 0 US coal exports could be near 0m tons in 0. The totals in the chart included both metallurgical and steam coals; however, much of the US coal with coking properties for use in making steel would have been sold in the US as steam coal but for the high seaborne market prices for metallurgical coals. Colorado producers have found opportunities for exports of Colorado coal primarily through the Gulf of Mexico. As an example of the steps being

13 taken to export Colorado coal, Kinder Morgan announced in the spring of 0 it will invest $1 million in its Port of Houston facility to export. million tons per year of Colorado coal (see Exhibit No. SA-1 for Kinder Morgan press release. With seaborne market prices delivered to Europe consistently above $1 per metric tonne this year, netback prices are attractive to Colorado producers. It is too early to tell how many tons in total of Colorado coal are being exported, but all the Colorado producers who actively participate in markets for coal are doing it or considering it. Q. PLEASE COMPARE THE DELIVERED COAL COSTS ACHIEVED WITH THE PEABODY CONTRACT TO THOSE WOOD MACKENZIE DERIVED IN THEIR MODELING. A. The negotiated delivered cost on a $/MMBtu basis (FOB mine coal cost plus rail transportation is higher than the Wood Mackenzie forecast prepared in early 0. This increase is due primarily to assumptions relating to reduced demand causing price reduction not proving out. In fact, as described above, global demand for Colorado coal has created a new market for Colorado coal that was not anticipated by Wood Mackenzie. None of the events causing a reduction in demand in Wood Mackenzie s model (the elimination of demand from Cherokee and Valmont has occurred yet, so market prices have not adjusted to those events.

14 $/MMBtu Year Wood Mackenzie Forecast Negotiated Prices 01 $1. $ Q. DOES THIS CONTRACT FULFILL PUBLIC SERVICE S OBJECTIVES OF SECURING LONG-TERM COAL SUPPLY AT REASONABLE COST SUPPLY FOR HAYDEN? A. Yes. While the above prices are higher than the Wood Mackenzie forecast, they reflect real market conditions. The contract provides Public Service with a supply of coal to Hayden at least though 01. The prices for the coal result in a reasonable cost of coal supply for Hayden V. SUMMARY AND CONCLUSION Q. PLEASE SUMMARIZE YOUR TESTIMONY. A. The Company has agreed to a long-term coal supply for Hayden to support the continued operation of the plant after the SCRs are installed to ensure the value of that investment is protected. 1

15 I have outlined the coal supply procurement process related to Hayden and the particular issues associated with supply options. Prior forecasts of costs used for the CACJA Plan are explained and compared to the current negotiated coal-supply agreement for the station. Q. DOES THIS CONCLUDE YOUR TESTIMONY AT THIS TIME? A. Yes. 1

16 Attachment A Statement of Qualifications Susan Arigoni I have a Bachelor of Arts degree from Duquesne University and an MBA in Finance from Regis University. I began my career at Public Service in 1 as a Financial Analyst in Corporate Finance. I have held various management positions including, Manager, Gas Transportation 1-1, Gas Rates Director 1-1, Director of Gas Planning, Marketing and Supply 1-1, Vice President, Planning and Budgeting for transmission and distribution operations from 1 to 000, and Vice President Asset Management for the generation business unit In 00, I assumed my current responsibilities as Vice President Fuels. In that position I am responsible for acquiring coal and coal transportation, natural gas and gas transportation and storage for all of Xcel Energy s electric operations and gas LDCs. I have provided expert and policy testimony before the Colorado Public Utilities Commission and the Federal Energy Regulatory Commission.