BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

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1 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION OF ) AEP SOUTHWESTERN TRANSMISSION ) COMPANY, INC. FOR RECOGNITION AS A ) PUBLIC UTILITY WITH POWERS OF EMINENT) DOMAIN AND CERTIFICATED FOR THE ) PUBLIC CONVENIENCE AND NECESSITY TO ) OWN AND OPERATE TRANSMISSION ) FACILITIES IN THE STATE OF ARKANSAS ) AND THE APPLICATION OF SOUTHWESTERN ) ELECTRIC POWER COMPANY TO TRANSFER ) CERTAIN SPECIFIED CECPN AUTHORITY AND) RESPONSIBILITIES TO AEP SOUTHWESTERN ) TRANSMISSION COMPANY, INC. ) OF FOR AEP SOUTHWESTERN TRANSMISSION COMPANY, INC. AND SOUTHWESTERN ELECTRIC POWER COMPANY DECEMBER, 0

2 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. INTRODUCTION 0 0 Q. PLEASE STATE YOUR NAME, BUSINESS AFFILIATION AND ADDRESS. A. My name is Robert W. Bradish. I am employed by American Electric Power Service Corporation (AEPSC), one of several subsidiaries of American Electric Power Company, Inc. (AEP). My business address is 00 Morrison Road, Gahanna, OH 0-. I am currently Vice President - Grid Development for AEPSC. Q. PLEASE PROVIDE AN OVERVIEW OF YOUR EDUCATIONAL BACKGROUND, PROFESSIONAL QUALIFICATIONS AND BUSINESS EXPERIENCE. A. I received a Bachelor of Science Electrical Engineering degree in May, and a Master of Science Electrical Engineering degree in December, both from Clarkson University. I also received a Master of Business Administration degree from The Ohio State University in May 00. I was employed by AEPSC in as an assistant engineer and progressed through several engineering grades to the senior engineer level. In 00, I was promoted to Manager Power and Transmission Market Analysis. In 00, I became Director of the same group. In 00, I was promoted to Vice President Transmission and Market Analysis. From 00 to 00, I was Vice President Market Operations in AEPSC s Commercial Operations group. In May 00, I assumed the position of Managing Director, Transmission Planning and Business Development where I was responsible for transmission planning and the origination, evaluation, and execution of strategic transmission investment opportunities in support of Page of

3 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 AEP s transmission business strategy. In January 0, I assumed my current position. I am also president of Pioneer Transmission, LLC. Q. WHAT ARE YOUR PRIMARY AREAS OF RESPONSIBILITY? A. As Vice President - Grid Development, I am responsible for AEP transmission system planning and operations, which includes organizing and managing all activities related to: ) assessing the adequacy of AEP's transmission network to meet the needs of its customers in a reliable, cost effective and environmentally compatible manner; ) the real-time operation of AEP s transmission assets in compliance with all applicable safety and reliability standards, contractual and tariff obligations and all federal, state and local regulations and laws; and ) advanced technical/analytical studies in support of planning, engineering, design and operation of the AEP transmission system. I am also responsible for managing/coordinating AEP s Transmission Technology/R&D Program. Q. HAVE YOU PREVIOUSLY TESTIFIED IN ANY REGULATORY PROCEEDINGS? A. Yes, I have testified before the Indiana, Michigan, Oklahoma and Virginia respective regulatory commissions. Q. WHAT IS THE PURPOSE OF YOUR? A. My testimony supports the joint application of SWEPCO and AEP Southwestern Transmission Company, Inc. (SW Transco) for the recognition of SW Transco as a public utility and approval for SWEPCO to transfer certain specified CECPN authority and responsibilities to SW Transco. Page of

4 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. Specifically, I will provide additional discussion on the public benefits associated with the SW Transco and how those benefits will affect Arkansas ratepayers. Specifically, I will: Describe the major factors that drive the need for new transmission investment 0 including the federal, regional and corporate reliability standards; Discuss how changes to current transmission planning reliability standards and other federal policies may affect SWEPCO and its need to invest in new transmission infrastructure; Discuss how the SW Transco model helps to support needed transmission investment; and Discuss how approval of the SW Transco will facilitate the development of a more robust and flexible transmission system that will enhance system reliability and provide access to lower energy costs for Arkansas ratepayers. II. DRIVERS FOR NEW TRANSMISSION INVESTMENT 0 Q. IS THE AEP TRANSMISSION DEPARTMENT RESPONSIBLE FOR TRANSMISSION PLANNING AND OPERATIONS FOR THE AEP OPERATING COMPANIES AS WELL AS THE AEP TRANSCOS? A. Yes. Although individual transmission facilities are owned by AEP Operating Companies and Transcos, the entire AEP transmission system is planned and operated on an integrated basis through the coordinated efforts of the AEP Transmission Department (AEP Transmission), a business unit of AEPSC. AEP Transmission works closely with neighboring utilities, other interconnected entities and the regional transmission Page of

5 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. organizations (RTOs) to plan and operate the transmission grid. Much of the 0 0 coordination is handled with and through the RTOs to align to the transmission planning and operating requirements set out in each RTO s protocols and operating criteria, as further defined through North American Electric Reliability Corporation requirements. Q. WILL THE APPROVAL OF THE SW TRANSCO AFFECT THIS PLANNING OR OPERATION OF THE AEP TRANSMISSION SYSTEM? A. No. As stated by Company Witness Lisa M. Barton, there will be no change in the planning or operation of the transmission system since the services provided to SW Transco will be through the same service providers and will be administered in the same manner that these services are being provided today to SWEPCO. Approval of the SW Transco will provide a vehicle through which SWEPCO can fulfill its obligations in a more efficient and cost effective manner. This will be discussed in greater detail later in this testimony. Q. WHAT ARE THE MAJOR FACTORS THAT DRIVE THE NEED FOR TRANSMISSION INVESTMENT? A. There are several factors that drive the need for transmission investment. Transmission investment is needed to maintain system reliability; replace obsolete or deteriorating equipment and facilities; relieve transmission congestion to enhance market efficiency; interconnect new generation resources; and meet customer demand through new or modified points of delivery and transmission service from generation to load. Q. HOW ARE RELIABILITY BASED TRANSMISSION NEEDS DETERMINED? Page of

6 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. A. Reliability based transmission needs are determined based upon objective assessments of transmission system performance relative to established federal, regional and company specific reliability standards. To the extent the transmission system fails to meet the 0 0 reliability standards, enhancements must be made. Q. HOW ARE THESE RELIABILITY STANDARDS ESTABLISHED? A. The federal reliability standards are developed and enforced by the North American Electric Reliability Corporation (NERC). NERC is the electric reliability organization certified by the Federal Energy Regulatory Commission (FERC) to establish and enforce reliability standards for the bulk power system. The Southwest Power Pool (SPP) is one of eight NERC Regional Entities and is responsible for overseeing regional reliability standard development and enforcing compliance. Company specific reliability standards are developed consistent with federal and regional standards and are filed with the FERC in the Annual Transmission Planning and Evaluation Report (FERC Form ). Q. ARE THERE PENALITIES IF THE NERC RELIABILTY STANDARDS ARE NOT MET? A. Yes. There are categories of fines if found in violation of NERC Reliability Standards with a maximum fine of up to $,000,000 per day. Q. DO THE RELIABILITY STANDARDS CHANGE OVER TIME? A. Yes. In fact, the FERC has tasked the NERC with ensuring that lessons learned from past blackouts of the bulk electric system are implemented. While the standards set by NERC for planning the transmission system have been in place for many years, there is an effort Page of

7 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 now underway to update the Transmission Planning Standards (TPL Standards) in order to capture insights derived from these learned lessons. Both SPP Criteria and AEP Transmission Reliability Criteria also change to meet NERC requirements, as well as any other changes deemed necessary to maintain system reliability. Q. WHAT ARE SPP CRITERIA? A. In some instances, the NERC documents are not in sufficient detail to meet specific needs of SPP. Additional necessary details have been adopted by SPP as Criteria. This Criteria is considered as the policies, standards or principles of conduct by which the coordinated planning and operation of the interconnected electric system is achieved. Q. ARE THE PROPOSED CHANGES TO THE NERC TRANSMISSION PLANNING STANDARDS INTENDED TO IMPROVE THE LEVEL OF SYSTEM RELIABILITY? A. Yes. Much of the improved NERC Transmission Planning Standards (TPL Standards) are focused on the Extra High Voltage (EHV) systems that serve as the highways for energy delivery ultimately to customer load. Certain system contingency conditions that in the past could be handled through the curtailment of load, if it was necessary to maintain system reliability, may no longer be acceptable under proposed NERC TPL Standards that must be met to ensure grid reliability. To meet these new standards, the transmission system must be more robust and must be designed to avoid any single point of failure. Generally speaking, robustness is achieved by increasing the number of paths in the EHV transmission system, so that loss Page of

8 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. of any one path does not result in any significant loss of load. As a result, new kv lines that integrate the transmission network will be studied and those that provide the greatest benefit will be built. Additionally, the major collection and distribution points on the transmission network must be designed to a new level of adequacy and security. Implementation of these new designs will require the retrofit and upgrade of existing EHV substations. Q. PLEASE PROVIDE SPECIFIC EXAMPLES THAT DEMONSTRATE THE REQUIREMENTS FOR A HIGHER LEVEL OF RELIABILITY. A. NERC TPL-00-a is a new standard that is currently under review and set for NERC 0 Board of Trustees approval in February of 0. If approved, NERC TPL-00-a Standard will replace a number of existing NERC TPL Standards. It will require that 0 transmission systems be designed such that the loss of any single generating unit or the loss of any single transmission element (n-), or the loss of a generating unit followed by the loss of a second generating unit or the loss of a transmission element (g--), does not result in an interruption of firm transmission service (except as required for generation redispatch obligations) or non-consequential load loss in excess of MW. Q. YOU MENTION THE TERM NON-CONSEQUENTIAL LOAD LOSS IN YOUR PREVIOUS ANSWER. PLEASE PROVIDE AN EXAMPLE OF NON- CONSEQUENTIAL LOAD LOSS. A. An example of non-consequential load loss is the use of preemptive load shed in an area to ensure that the system will remain secure for the potential loss of a transmission line Page of

9 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. that serves the area. The transmission operator determines that should this preemptive 0 load shed in an area be required, that this load be identified prior to the need for the load shed. If the reliability of the system is at stake, to prevent system cascading that would result in loss of service for load to an entire region, the NERC TPL-Standards provide for such identified load to be planned to be dropped quickly to protect the integrity of the transmission system. Q. ARE YOU AWARE OF ANY EXAMPLES WHEN SWEPCO HAD TO CONSIDER REQUESTING ARKANSAS LOAD TO VOLUNTARILY REDUCE ITS DEMAND AS A RESULT OF NEEDED TRANSMISSION THAT NEEDED TO BE CONSTRUCTED? A. Yes, my transmission planning staff in Tulsa informed me that when a new kv line from Chambers Spring to Tontitown in Arkansas did not obtain its CECPN permit as requested, SWEPCO was required to provide weekly reporting to the APSC on the status of actions being taken to get the line built. SWEPCO was ordered by the Administrative Law Judge in SWEPCO s initial filing to again review an alternate route through a national forest that SWEPCO had initially tried to avoid due to the regulatory uncertainty of seeking an additional route through the national forest. SWEPCO already had one transmission line in place through the forest and tried to avoid adding the additional line. Until this line was approved by the APSC to be constructed, SWEPCO contacted loads in Non-consequential load loss refers to non-interruptible load loss that does not include load that is no longer served as a result of a transmission element being removed from service (consequential load loss), the response of voltage sensitive load or load that is disconnected by end-user equipment. Page of

10 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 northwest Arkansas to voluntarily reduce or curtail loads in times of usage stress on the system. Q. HAVE MORE STRINGENT RELIABILITY STANDARDS BEEN ADOPTED BY ANY REGIONAL RTOS PRIOR TO THE PROPOSED NERC TPL STANDARDS MODIFICATIONS? A. Yes. The Pennsylvania-New Jersey-Maryland (PJM) RTO and the Electric Reliability Council of Texas (ERCOT) independent system operator (ISO) have both adopted reliability standards that go beyond the current NERC TPL Standards. Q. DOES SWEPCO BELIEVE SPP WILL ADOPT RELIABILITY STANDARDS BEYOND THE CURRENT NERC TPL STANDARDS? A. Yes, SWEPCO believes it is likely that the SPP will also require an improved level of transmission reliability in the future, given the current activity related to improved NERC Transmission Planning Standards and the steps that have been taken in other RTO/ISOs to increase the level of reliability that is required on the bulk electric system. Also, with the integrated marketplace expected to be in place in 0 in SPP, the transmission system will be stressed in ways that it has not experienced historically and additions to the transmission system are anticipated. Q. HOW WILL THESE CHANGES AFFECT SWEPCO AND ITS NEED FOR TRANSMISSION INVESTMENT? A. As a Transmission Owning member of the SPP RTO, SWEPCO is required to complete transmission projects as mandated by SPP. SPP directs transmission owners to construct transmission facilities for the provision of transmission service, generation Page 0 of

11 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. interconnections, reliability compliance and economic needs. To the extent the NERC or SPP reliability standards are revised to improve the level of system reliability, it may be necessary to invest in new transmission infrastructure to meet the new standards. Q. ARE THERE FEDERAL POLICIES OTHER THAN RELIABILITY STANDARDS THAT MAY IMPACT THE NEED FOR TRANSMISSION INVESTMENT? A. Yes. Clearly the federal production tax credits for renewable resources have had a dramatic impact on the SPP transmission system. The initial impact has been the 0 development of major transmission lines that connect the wind rich parts of Texas, Kansas and Nebraska to the core of the SPP transmission system. While these lines deliver renewable energy to customers within the SPP, the transmission lines that would enable the consumption of renewable energy in states that border the SPP have not been adopted into the SPP Transmission Expansion Plan (STEP). The SWEPCO system is situated on the eastern edge of the SPP system, and as such SWEPCO would provide the transmission infrastructure from which to construct new lines that deliver renewable energy to Arkansas from the core of the SPP system, as well as to regions external from SPP. New transmission infrastructure will also be needed in order to alleviate constraints that result from the new flow patterns and to ensure that the energy generated from the new resources can be delivered to the load centers where it is needed the most. 0 Q. YOU STATED THAT TRANSMISSION INVESTMENT IS NEEDED TO REPLACE OBSOLETE OR DETERIORATING EQUIPMENT AND FACILITIES. PLEASE ELABORATE. Page of

12 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. A. The transmission system in the U.S. evolved over the last century in which there was rapid growth from the 0 s through the 0 s paralleling the technological advances. The facilities installed during that period are reaching the end of their projected useful life. Over recent decades, the majority of transmission investment has been directed towards constructing new facilities to meet customer demand while maintaining compliance with federal and regional reliability standards. Consequently, there are many transmission facilities in the U.S. that are obsolete, old and/or deteriorating (aging infrastructure). To address this national transmission infrastructure issue, AEP has 0 launched a local reliability program to replace aging infrastructure equipment at its Operating Companies, including SWEPCO, to ensure that reliability and economic operation of the transmission system are maintained. One of the benefits of the approval of the SW Transco will be to allow for the replacement of such aging infrastructure equipment on SWEPCO s transmission system sooner rather than later. As noted in other testimony in this docket, SWEPCO has capital needs for its generation retrofits, transmission investments, as well as needs for its distribution system. SW Transco allows certain transmission capital investments, as noted in the Project Selection Guidelines, to move from SWEPCO s balance sheet to the SW Transco. Approval of SW Transco will facilitate the equipment replacement 0 referenced above sooner versus later, while also reducing SWEPCO s capital burden. If the SW Transco is approved, the replacement of this aging infrastructure can be accommodated without SWEPCO having to make the decision to delay its replacement due to its capital needs in other areas of its business. As noted by Company Witness John Page of

13 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. E. Cogan, the transmission only business has been able to attract lower cost financing than has been available to AEP s Operating Companies thus resulting in lower total project cost for projects constructed by the Transcos. Q. HOW CAN TRANSMISSION INVESTMENT HELP TO ALLEVIATE TRANSMISSION CONGESTION AND ENHANCE MARKET EFFICIENCY? A. Transmission facilities provide additional paths for energy to flow to meet customer demand. SPP operates an Energy Imbalance Service (EIS) market whereby load serving entities may buy or sell wholesale energy in real-time to meet unexpected customer demand or to displace higher cost energy. As an SPP load serving entity, SWEPCO 0 participates in the SPP EIS market. The Arkansas Public Service Commission (APSC) has acknowledged in Docket No. 0-, Order No., that "...it is evident that SWEPCO's Arkansas ratepayers have accrued net benefits during the first three years of the SPP EIS market." (p. ) A robust transmission system provides the means for delivery of this lower cost energy when it is available for purchase by SWEPCO or other providers for the benefit of their Arkansas ratepayers located in the SPP. By way of example, the transmission line included in the Northwest Arkansas kv Flint Creek to Ship Road project will provide additional paths for energy to flow to Arkansas 0 ratepayers and the ability to access lower cost energy sources. In 0, the SPP plans to move to a new day-ahead integrated market that commits generation in advance of the real-time market using Locational Marginal Pricing Flint Creek to Shipe Road kv transmission line that SWEPCO has requested the APSC in its Application in this Docket to transfer its CECPN authority and responsibilities to SW Transco. Page of

14 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. (LMP). It is likely that new transmission infrastructure will be needed to capture 0 0 economic benefits associated with the SPP market conversion. Rather than individual utilities committing their own generation for the next day, the SPP day-ahead market will determine which generating units should run the next day for maximum cost-effectiveness based on the resources available for the region as a whole. By optimizing available generating resources on a regional basis, the overall costs for the SPP footprint will be reduced. However, regional resource optimization will change the historic flow patterns on the transmission system and the implementation of a nodal LMP market will expose areas of transmission congestion. Transmission congestion occurs when the desired amount of least-cost electricity is unable to flow to customers due to physical constraints on the transmission system. While transmission plans being prepared today reflect anticipated congestion costs through the use of production cost models, markets already operating in other parts of the country have experienced high congestion costs for circumstances that were not predicted by the production cost models. There is experience to show that additional transmission system upgrades result from the implementation of a nodal LMP market with regional resource optimization. Q. WHAT OTHER FACTORS DRIVE THE NEED FOR TRANSMISSION INVESTMENT? A. Investment in new transmission infrastructure is needed to interconnect new generation and support customer growth and expansion. Many of the new generation Page of

15 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. interconnection requests are from renewable energy sources. New transmission infrastructure is needed to interconnect these new generation resources and allow delivery of the associated energy production. Transmission infrastructure is also needed to support customer growth and expansion. Depending upon the magnitude and location of the customer growth, new transmission investment may be needed to interconnect the new load and provide reliable service to meet their energy requirements. III. APPROVAL OF SW TRANSCO WILL HELP FACILITATE NEW TRANSMISSION INVESTMENT 0 Q. YOU HAVE DESCRIBED A NUMBER OF FACTORS THAT DRIVE THE NEED FOR SIGNIFICANT AND SUSTAINED TRANSMISSION INVESTMENT. HOW WILL APPROVAL OF THE SW TRANSCO HELP TO ENSURE THAT 0 CAPITAL WILL BE AVAILABLE TO SUPPORT THE NEEDED TRANSMISSION INVESTMENT? A. As more fully discussed in the direct testimonies filed previously in this docket and the supplemental testimonies of Company Witnesses Venita McCellon-Allen and John E. Cogan, approval of the SW Transco will relieve SWEPCO of the financial burden to construct transmission facilities, freeing up its limited capital for use on distribution and generation projects. SW Transco will be focused solely on transmission projects and will have access to capital from different sources without being limited by the funding level available within SWEPCO. The resources that will be available to Arkansas customers Page of

16 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 through the SWEPCO / SW Transco combination will enable fulfillment of SWEPCO s responsibilities in a more efficient and cost effective manner. Q. WITH THE NEED FOR TRANSMISSION INFRASTRUCTURE UPGRADES INCREASING, WHAT HAPPENS IF SWEPCO CANNOT FINANCE ALL THE NEEDED TRANSMISSION PROJECTS? A. As stated earlier, there are many drivers for needed transmission and the portfolio of projects includes both SPP RTO identified projects as well as SWEPCO local reliability projects. While many projects are driven by the SPP RTO such as reliability, congestion management, transmission service, public policy and generation interconnections, there are also projects driven by SWEPCO s own local reliability needs. If SWEPCO cannot meet its own local reliability needs, including the need to replace its aging transmission infrastructure as well as service to new loads, due to capital constraints a decision has to be made on what projects to defer or to reduce the level of service to a new load. Some new loads require extensive additions to the transmission system for their expected quality of service. While lesser cost system additions can accommodate such loads, the customer may desire a higher level of service. The approval of the SW Transco with its independent financing structure, will allow the SWEPCO local reliability and customer service needs to be met in a more timely and cost effective manner thus benefiting the Arkansas ratepayers with increased system reliability. The combination of SWEPCO and the SW Transco to construct the needed transmission on SWEPCO s existing system provides the ability to finance all the needed Page of

17 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. transmission. The approval of the SW Transco relieves SWEPCO from the decision to elect to give away the project to a third-party. Q. WHAT OPTIONS ARE AVAILABLE TO SWEPCO FOR SPP MANDATED PROJECTS? A. SPP Governing documents (Membership Agreement and SPP OATT) provide that a Transmission Owner construct the transmission facilities that SPP directs them to build by the SPP-identified Need Date. The Transmission Owner has ninety (0) days to 0 accept the SPP Notification To Construct (NTC). Within that ninety days, the Transmission Owner is allowed to: ) accept the NTC to construct the project; ) find another party to construct the facilities on its behalf, under that third-party s rates; or ) ask SPP to find another qualified entity to construct the needed transmission facilities, under that third-party s rates. Therefore, other entities could construct, own and operate the needed greenfield transmission facilities on SWEPCO s system should SWEPCO not have the financial capability to build. However, the Transmission Owner is not relieved of its obligation to construct an SPP-directed upgrade in the event that no other qualified entity can be found to construct the project. Q. IS IT POSSIBLE THAT SWEPCO WOULD HAVE TO DEFER A LOCAL RELIABILITY PROJECT TO CONSTRUCT AN SPP MANDATED PROJECT SHOULD SWEPCO NOT HAVE THE CAPITAL FOR BOTH PROJECTS? The SPP Need Date is the SPP determined date the project needs to be in-service. The TO provides the in-service date the project can be constructed based on the lead time provided by the SPP. The SPP NTC is the official directive to a Transmission Owner to proceed with a project. Page of

18 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. A. Yes, SWEPCO might have to defer a local reliability project that SWEPCO had planned to complete to meet its SPP obligations as a Transmission Owning member to construct the SPP mandated project. SPP identifies a Need Date based on when they have determined the project is required and SPP cannot change this Need Date just because a Transmission Owner cannot construct the project due to a lack of capital. With the approval of the SW Transco, SWEPCO would have the ability for the SW Transco to build the projects. The SW Transco is an enhancement to SWEPCO for needed transmission and allows for more needed transmission than SWEPCO otherwise would be able to construct with limited capital. The SW Transco, as an AEP affiliate, also 0 0 provides the same level of service that SWEPCO s customers have historically experienced versus a potentially unknown third-party that may not have local service centers for service restoration or other needs. Q. IS IT POSSIBLE IF SWEPCO DOES NOT HAVE THE CAPITAL TO BUILD AN SPP MANDATED PROJECT THAT SPP WOULD FIND ANOTHER ENTITY TO BUILD THE PROJECT BY THE NEED DATE? A. Yes, SPP has the ability to issue a request for proposals to build projects that designated Transmission Owners cannot build. While SPP has not needed to take this action to date as Transmission Owners that could not build an SPP mandated project found another entity to build in its place, this would result in some other entity building the needed project at its rates. The cost of the project from this third-party at its rates would be assigned to all SPP members, including SWEPCO, which might be higher than had the SW Transco built the project. The SW Transco, if approved by this Commission, Page of

19 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 provides the vehicle to continue to invest in SWEPCO s transmission system in Arkansas. Q. PLEASE EXPLAIN WHY A TRANSMISSION OWNER IS REQUIRED TO CONSTRUCT SPP-DIRECTED FACILITIES. Pursuant to the SPP Membership Agreement, a Transmission Owner shall use due diligence to construct transmission facilities as directed by SPP in accordance with the Open Access Transmission Tariff (OATT) and this Agreement, subject to such siting, permitting, and environmental constraints as may be imposed by state, local and federal laws and regulations, and subject to the receipt of any necessary federal or state regulatory approvals and such construction shall be performed in accordance with Good Utility Practice, applicable SPP Criteria, industry standards, Transmission Owner s specific reliability requirements and operating guidelines (to the extent these are not inconsistent with other requirements), and in accordance with all applicable requirements of federal or state regulatory authorities. Q. HAVE ANY TRANSMISSION OWNERS IN SPP DETERMINED THE NEED FOR ANOTHER PARTY TO BUILD THE SPP-DIRECTED FACILTIES? A. Yes. Both Western Farmers Electric Cooperative in Oklahoma and Sunflower Electric in Kansas assigned and then novated SPP-directed projects to ITC. Westar assigned and then novated a SPP-directed project to an AEP affiliate, Prairie Wind in Kansas. The 0 SPP Board of Directors approved the requested assignments and novations after review of information provided by SPP s consultant regarding the capability of ITC and Prairie Wind to construct and operate the respective novated projects. Page of

20 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 Q. IF THE SWEPCO AFFILIATE, SW TRANSCO, IS APPROVED TO CONSTRUCT NEEDED TRANSMISSION FACILITES IN ARKANSAS, IS THIS A BENEFIT TO THE ARKANSAS JURISDICTION? A. Yes. Arkansas customers will experience the same high level of planning and operation that they currently experience from SWEPCO. Just like SWEPCO, the SW Transco will be a part of the nation s largest transmission company, owning a nearly,000-mile transmission network that serves approximately. million customers in U.S. states. AEP s transmission system directly or indirectly serves about 0 percent of the electricity demand in the Eastern Interconnection and approximately percent of the electricity demand in ERCOT. AEP is an industry leader with a vast array of skills and unmatched experience in the planning, design and construction of transmission facilities. Throughout its history, AEP has been on the leading edge of advancements in electric transmission technology and applications including the first kv interconnection, first kv transmission line, first application of a static var system to maintain voltage on the transmission network, first back-to-back asynchronous voltage-sourced converter, first variable frequency transformer in the U.S., just to name a few. This extensive base of resources, knowledge and experience will be available to SW Transco to bring innovative, cost effective transmission solutions for the benefit of Arkansas ratepayers. In addition, SWEPCO and AEPSC are known entities to the APSC. SWEPCO and AEPSC have developed a working relationship with the APSC and the SW Transco would continue to invest the time and effort necessary to maintain that working Page 0 of

21 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 relationship. As discussed earlier, the same AEPSC staff that provides the transmission support for SWEPCO will provide the same support for the SW Transco. Q. IF SWEPCO CANNOT BUILD TRANSMISSION DUE TO FUNDING ISSUES AS DESCRIBED BY COMPANY WITNESSES BENNETT AND BOTELER DIRECT TESTIMONIES, IS THERE ANY ALTERNATIVE BESIDES NOVATING TO A NON-AFFILIATED PARTY? A. In some instances it may be possible for SWEPCO to develop a mitigation plan acceptable to SPP that would delay the in-service date for a project until that project can be built. However, this measure is normally only used when a project cannot be built by the SPP need date due to short lead times provided by SPP to complete a project. This approach is preferred only if the need date cannot be met due to the risks associated with delaying needed projects. A mitigation plan is typically an interim solution to a transmission problem that can temporarily delay the need for a longer-term, more comprehensive solution. Q. WHAT IF A MITIGATION MEASURE IS NOT AVAILABLE? A. If acceptable mitigation measures are not available, SWEPCO would be forced to request the SPP Board of Directors to novate such project to a third-party. In that case 0 ratepayers, including Arkansas retail ratepayers, would still be responsible for the costs associated with the project constructed by a third-party, but would lose the benefits associated if such project were built by one of the lowest cost, most innovative transmission providers in the country. SWEPCO to take that action. The SW Transco model would not require Page of

22 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. IV. CUSTOMER BENEFITS ASSOCIATED WITH APPROVAL OF THE SW TRANSCO 0 0 Q. WHAT VALUE WOULD THE SW TRANSCO BRING TO ARKANSAS RATEPAYERS? A. Approval of the SW Transco will enable SWEPCO to make needed improvements to its transmission system, improving reliability of service to Arkansas ratepayers, including SWEPCO customers. In addition, SWEPCO is located on the seams between SPP and MISO; SPP and Entergy (that has announced its plan to join MISO); and SPP and Associated Electric Cooperative Inc (AECI). SWEPCO may be asked to construct future projects between these regions for the non-competitive FERC Order 000 projects. The SW Transco will provide public benefits to Arkansas ratepayers, as well as benefits to the SPP region as a whole, with the ability to construct projects that SPP may ask SWEPCO to build. There is an increasing pressure at the national and regional levels to invest in transmission in order to move from an era when transmission was just a delivery system to an era where transmission infrastructure is needed to enable energy markets and improve reliability at the RTO level, in this case the SPP. In order to support the enhancement of the existing SWEPCO transmission system and support the new expectations resulting from integration of the regional grid, the SW Transco should be approved. Page of

23 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. Q. ARE THERE BENEFITS TO ARKANSAS RATEPAYERS BY BUILDING THE TRANSMISSION LINES IDENTIFIED AS NECESSARY BY THE SPP RTO IN ITS PLANNING PROCESSES? A. Yes. The APSC has stated in Docket No. 0-0-U, Order No., that The Commission has recently found that significant savings have accrued to the benefit of ratepayers as a result of RTO membership" and that "the Commission has determined there are continued benefits to the Arkansas members of the SPP RTO and believes that regionally planned transmission is of significant benefit to Arkansas ratepayers." The facilities in 0 that docket were determined to be needed by the SPP RTO transmission planning process. Strengthening SPP's transmission infrastructure will also address SPP's transmission service customer needs and help to relieve the backlog in SPP's generation interconnection queue and for transmission service. The FERC requires non- 0 discriminatory and transparent access to the electric grid as found in FERC Order Nos., and 0, as well as FERC Order No. 00 for generation interconnections. The SPP OATT provides the means for generators, loads and parties needing transmission services to ask for these transmission services from the SPP. Q. ARE THERE OTHER PUBLIC BENEFITS THAT IMPROVED ELECTRIC TRANSMISSION AND DISTRIBUTION SYSTEMS PROVIDE TO ARKANSAS RETAIL RATEPAYERS? APSC Docket No. 0-0-U, Order No., p. of Page of

24 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. A. Yes. For example, when storms devastate an electric system, as was experienced in the Joplin, Missouri area a few years ago, the transmission and distribution system must be robust enough to provide flexible service to customers. While the damage in Joplin was so severe that portions of the transmission and distribution system and homes were destroyed (reducing some customer load), there were remaining customers in the area that needed a flexible electric system to continue to reliably serve The Empire District Electric Company retail load. This disaster confirms the need for investment in both transmission and distribution in order to reliably serve load. Allowing the SW Transco 0 0 to reduce the burden of transmission investment from SWEPCO s financial responsibilities allows SWEPCO to allocate more capital to its distribution system. The combination of a robust transmission and distribution system provides a public benefit in increased reliability to Arkansas ratepayers. Another benefit associated with SW Transco ownership and operation of Arkansas transmission facilities is timely and efficient service restoration following weather related outages. The SWEPCO / SW Transco combination will have access to local resources that can be mobilized for quick response to transmission and/or distribution outages. Approval of the SW Transco will allow Arkansas customers to receive the same level of service that they have come to know from SWEPCO. Q. DOES AN IMPROVED ELECTRIC TRANSMISSION SYSTEM PROVIDE A MEANS OF LOWERING ENERGY COSTS TO ARKANSAS RATEPAYERS? A. Yes, as recognized by the Arkansas Public Service Commission on page of its August, 0 order in this docket, there is a public need for an improved electric transmission Page of

25 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. system as a means of lowering energy costs for Arkansas ratepayers. The Commission further stated that it strongly supports the improvement in a transmission system in Arkansas and the region as a means to lower energy costs for Arkansas ratepayers. The ability to invest in needed transmission infrastructure to accommodate both the flexibility in the transmission system to provide access to generation with lower cost energy, as well as to provide alternate paths to serve loads during times of stress on the electric grid provides a public benefit. A robust transmission system provides alternate paths for 0 energy to flow to load, including from generators that provide lower cost energy sources. Q. HOW DO TRANSMISSION FACILITIES PROVIDE BENEFIT TO ARKANSAS RATEPAYERS? A. Building a robust transmission system provides alternative paths for energy to flow during contingencies (outage of transmission facilities) to continue to serve loads and to provide access to energy from generation resources connected to the electric grid. When a transmission line in one portion of the system is out of service due to a storm, planned maintenance or other purpose, energy will flow on the remaining system. Having a robust transmission system in Arkansas will benefit consumers by having greater flexibility in the system to maintain reliability of the electric grid. The more transmission lines that are in service, the more paths that are available for energy to flow to loads. This benefits Arkansas ratepayers by allowing more 0 transmission paths to keep their lights on in times of system stress. It should also be noted that transmission facilities are an example of Arkansas common carrier facilities that provide public service and benefits to the public as a whole. Page of

26 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 0 Q. WILL ARKANSAS RATEPAYERS RECEIVE THE SAME BENEFITS IF THE SW TRANSCO IS NOT APPROVED? A. No. As previously mentioned, SWEPCO has limited capital that must be allocated among transmission, generation and distribution. While projects mandated by the SPP must be constructed (by SWEPCO or another entity), local reliability transmission projects, and replacement of aging assets may be postponed; or SPP mandated projects may need to be constructed by a third-party due to a lack of funding. The APSC and Arkansas customers have a long-standing relationship with SWEPCO and have come to know and expect the high level of service that has been provided by SWEPCO for many years. Approval of SW Transco will provide the vehicle through which these services will continue to be provided in the future. Approval of SW Transco will allow SWEPCO to fulfill its obligations in a more efficient and cost effective manner. It is also worth re-iterating that SW Transco will have access to the resources, knowledge and experience from one of the lowest cost, most innovative transmission providers in the nation. If the SW Transco is not approved, Arkansas ratepayers may not receive the reliability and economic benefits that are available through AEP s unmatched expertise in the planning, design and construction of transmission facilities. Q. DO YOU HAVE ANY OTHER COMMENTS TO MAKE? A. Yes. I would clarify that on page of the August, 0 order in this docket that SWEPCO is not under the SERC Reliability Corporation electric reliability standards but is under SPP reliability standards. Page of

27 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 V. CONCLUSION Q. PLEASE SUMMARIZE YOUR. A. The need for investment in new transmission infrastructure is driven by a number of factors including RTO mandated projects to address reliability needs, aging assets, customer growth, transmission service, generation interconnections, economic projects to facilitate the delivery of energy from multiple resources for the existing SPP EIS market and the planned SPP day ahead integrated marketplace, as well as transmission needed for federal and public policies. Changes to the current reliability standards and other federal policies may require transmission improvements to continue to reliably serve SPP customers, including Arkansas customers. The SW Transco model helps support this needed investment by providing a vehicle for financing that is separate from the financing needs of SWEPCO. Approval of the SW Transco will relieve SWEPCO of the financial burden to construct transmission facilities, freeing up its limited capital for use on distribution and generation projects. SW Transco will be focused solely on transmission projects and will have access to capital from different sources without being limited by the funding level available within SWEPCO. The approval of the SW Transco will also facilitate the development of a 0 more robust and flexible transmission system through the construction of transmission projects in the SPP footprint. SW Transco is an AEP entity that will have access to the resources, knowledge and experience from one of the lowest cost, most innovative transmission providers in the nation. If the SW Transco is approved, Arkansas ratepayers will be able to receive the Page of

28 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: Docket -00-u-Doc. 0 reliability and economic benefits that are available through AEP s unmatched expertise in the planning, design and construction of transmission facilities. Approval of the SW Transco will not change the focus or lessen SWEPCO s commitment to fulfilling its historic obligations, but it will allow those obligations to be met in a more efficient and cost effective manner. The resources that will be available through the SWEPCO / SW Transco combination will be greater than those available to SWEPCO on its own. Approval of the SW Transco will allow that combination of resources to be leveraged for the benefit of Arkansas customers and the SPP region as a whole. Q. DOES THIS CONCLUDE YOUR? A. Yes, it does. Thank you for the opportunity to submit supplemental testimony on behalf of SW Transco and SWEPCO in this docket. Page of