EXHIBIT 99.1
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RESPONDENT'S EXHIBIT PRL-1
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STATE OF INDIANA
INDIANA UTILITY REGULATORY COMMISSION
IN THE MATTER OF THE PETITION OF )
)
THE CITY OF GARY, INDIANA )
REQUESTING THE INDIANA )
UTILITYREGULATORY COMMISSION )
ESTABLISH THE TERMS AND )
CONDITIONS OF THE SALE OF CERTAIN ) Cause No. 42643
PROPERTY OF NORTHERN INDIANA )
PUBLIC SERVICE COMPANY TO THE )
CITY OF GARY AND FOR A )
DETERMINATION OF THE VALUE OF )
SUCH PROPERTY UNDER INDIANA )
CODE SECTIONS 8-1-2-92 AND 8-1-2-93 )
RESPONDENT: NORTHERN INDIANA )
PUBLIC SERVICE COMPANY. )
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PREPARED DIRECT TESTIMONY OF
PIERRE R.H. "PETE" LANDRIEU
ON BEHALF OF NORTHERN INDIANA PUBLIC SERVICE COMPANY
=====================================================
Daniel W. McGill, Atty No. 9489-49
Claudia J. Earls, Atty No. 8468-49
Barnes & Thornburg LLP
11 S. Meridian St.
Indianapolis, IN 46204
Telephone: (317) 231-7229
Fax: (317) 231-7433
Email: dmcgill@btlaw.com
Attorneys for Respondent
July 9, 2004 NORTHERN INDIANA
PUBLIC SERVICE COMPANY
PREPARED DIRECT TESTIMONY OF PIERRE R.H. "PETE" LANDRIEU
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I. INTRODUCTION
Q: PLEASE STATE YOUR NAME, OCCUPATION, AND BUSINESS ADDRESS.
A: My name is Pierre R.H. "Pete" Landrieu. I am President of PLP3, a
consultancy specializing in electric power generation,
transmission, wholesale electric markets, Independent System
Operators ("ISOs"), Regional Transmission Organizations ("RTOs")
and associated regulatory policies. My business address is 10
Sentinel Drive, Basking Ridge, N.J. 07920.
Q: WHAT IS YOUR EDUCATIONAL BACKGROUND?
A: I graduated from Lehigh University with a Bachelor of Science
degree in Electrical Engineering.
Q: PLEASE DESCRIBE YOUR EMPLOYMENT EXPERIENCE.
A: In 1963, I began a 40 year career at Public Service Electric and
Gas Company ("PSE&G"), a large combination electric and gas
utility in New Jersey, where I performed transmission and
distribution system planning and engineering studies and
contributed to the construction and operation of fossil and
nuclear generating facilities. I was Project Manager for the
building of the Hope Creek Nuclear Generating Station during the
early 1980s. I became Vice-President of Engineering and
Construction in 1986; Vice-President of Fossil Generation in
1989; Vice-President of Electric Transmission in 1995 and Vice-
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President of Federal Regulatory Policy in early 2003. I retired
from PSE&G in August 2003.
I have experience managing a variety of business components
of the electric industry, including generation and transmission
assets, industry restructuring activities, wholesale electric
markets, PJM and system reliability.
For six years I was the executive in charge of PSE&G's
fossil-fueled Generation Business, during which time I installed
environmental upgrades on three coal generating stations,
converted a former coal station to combined cycle operation and
converted simple cycle gas turbines to combined cycle operation.
The environmental upgrades I directed included installation of
low NOx burners with over-fire air, electrostatic precipitators,
selective catalytic reduction technology, waste water treatment
facilities, cooling towers and pond liners. In the course of my
career I have participated in the operation, design, construction
and start-up of over forty electric generation units including
combustion turbines ("CTs"), combined cycle, hydro, coal-fired
steam units and nuclear units.
For five years I served on the Board of Directors of Clean
Air Action, a business venture formed in the early 1990s to
promote and profit from trading and banking of air emissions.
I have been involved with the PJM Mid-Atlantic power pool
and ISO for over thirty five years and participated in its
restructuring as PJM evolved from a tight power pool into an ISO
and subsequently into a RTO. I participated in PJM task forces
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in the 1960s and 1970s which culminated in papers published by
the Institute of Electrical and Electronic Engineers. During the
1990s, I served as Chairman of the PJM Management Committee, the
owners committee charged with directing the activities of PJM.
In 1995, after the Federal Energy Regulatory Commission ("FERC")
issued an "open access" Notice of Proposed Rulemaking that
accelerated the restructuring of the electric industry, I chaired
the PJM Market Issues Resolution Group that developed and planned
the design for PJM's conversion from a tight power pool to an ISO
and electricity market. In December 1995, I testified at FERC
regarding the planned design features of the PJM ISO. I
participated in the preparation of filings at FERC that led to
the approval of PJM as an ISO in 1996.
I have participated for the last eight years in various PJM
committees and testified at U.S. Senate hearings regarding PJM
and workable wholesale electricity markets. In 2003, I testified
at FERC regarding transmission-generator interconnections on
behalf of the Edison Electric Institute, the industry association
of investor owned utilities in the United States.
For eight years during the period of electric industry
unbundling and restructuring, I led PSE&G's Transmission Business
Unit. During that time, I was involved in three separate
initiatives to develop independent stand-alone transmission
companies. In that connection I worked extensively with the
financial community regarding the valuation and financing of
transmission companies.
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I have made presentations to FERC, the Harvard Electric
Policy Group, congressional representatives and numerous industry
forums regarding the business propositions and issues surrounding
transmission, generation and wholesale market issues.
For the past six years I served as Chairman of the Mid-
Atlantic Area Council ("MAAC"), the Regional Council with
oversight of reliability in the PJM region. I represented MAAC
in the Fact Finding investigation by the Department of Energy
("DOE"), FERC and the North American Electric Reliability Council
("NERC") into the August 14, 2003 electric blackout in the
Northeast.
In August 2003 I retired from PSE&G and established a
consultancy specializing in electric power issues and policy.
Q: HAVE YOU PREVIOUSLY TESTIFIED BEFORE OTHER REGULATORY COMMISSIONS
AND COMMITTEES?
A: In addition to the aforementioned FERC testimony, I have
testified before the New Jersey Board of Public Utilities and the
Senate Committee on Energy and Natural Resources.
Q: WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
A: I was retained by Northern Indiana Public Service Company
("NIPSCO") to review and express an opinion on the advisability
of starting up NIPSCO's Dean H. Mitchell Generating Station
("Mitchell"), giving consideration to NIPSCO's load profile,
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current and impending operating and regulatory requirements and
the evolving electric energy marketplace.
Q: PLEASE DESCRIBE THE INVESTIGATION YOU MADE AND THE INFORMATION
YOU REVIEWED IN PERFORMING THIS ANALYSIS AND IN DEVELOPING YOUR
OPINION.
A: I reviewed the testimony of NIPSCO's witnesses in this proceeding
and discussed the issues with them and other representatives of
the Company. I have reviewed NIPSCO's FERC Form One and other
documents relating to the issues. I have also reviewed documents
provided by PJM regarding the planned PJM/MISO joint and common
market.
Q: HOW DOES THE STATE OF THE PJM WHOLESALE ENERGY MARKET COMPARE TO
MISO'S MIDWEST MARKET INITIATIVE?
A: The PJM energy market started in 1997 and was modified in 1998.
It has continued to grow in size with the addition of PJM West,
the recent addition of Commonwealth Edison and the pending
additions of AEP, Duquesne and Dominion. The PJM energy market
has also continued to become more sophisticated with the
development of features such as a regulation market, capacity
market, and the auction of financial transmission rights. PJM is
about eight years ahead of MISO with respect to operating
wholesale energy markets. In my opinion, the PJM experience is
relevant to evaluating how the MISO energy market will develop.
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Q: PLEASE SUMMARIZE THE MATTERS COVERED IN YOUR DIRECT TESTIMONY.
A: My Direct Testimony will discuss my opinion that the regulatory,
environmental and market uncertainties in the electric industry
as well as the unique load profile of NIPSCO's electric customers
make Mitchell's return to service unwise. In the course of my
testimony, I will explain that:
(a) NIPSCO's unique load profile presents challenges to
which the Mitchell plant is ill suited, particularly given new
standards, enforcement, audits, disclosure policy and penalties
of NERC;
(b) the environmental and associated financial risks which
attend return to service of a 1950s era coal plant are large and
unquantifiable at present;
(c) the competitive wholesale markets for electricity which
MISO is endeavoring to establish are problematic for a base load
coal plant like Mitchell;
(d) the timing of MISO energy markets becoming established
is uncertain and why this increases the risk of investment in a
startup of Mitchell;
(e) the rules and regulations in the electric industry are
in the midst of significant change in several regulatory venues
as the industry restructures; and that resolution of the many
issues in play is not close at hand nor are the outcomes
predictable; and
(f) the restructuring and regulatory initiatives in
Congress, FERC, NERC, and DOE, are wildcards that could bear
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heavily on the viability of Mitchell and these initiatives do not
yet promise near-term predictable outcomes.
Because of the above substantial financial and regulatory
risks that would attend a startup of Mitchell, a very certain and
very high benefit would be required to justify startup; I see no
such certain, high benefit.
II. NIPSCO LOAD PROFILE AND SUPPLY
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Q: WHAT IS UNIQUE ABOUT NIPSCO'S LOAD PROFILE AND HOW DOES THIS BEAR
ON THE STARTUP OF MITCHELL?
A: As discussed by Mr. Frank A. Venhuizen in his direct testimony
and as shown by his exhibits, it is apparent that NIPSCO's
customer load profile is unique with regard to its regulation
needs.
Coal base load plants such as Mitchell are poorly suited to
provide the type of regulation that this severe load profile
demands. NIPSCO is already fine-tuning the automatic generation
control ("AGC") capabilities of its plants and has plans to
provide the best load following capability inherent in the
equipment.
As Mr. Venhuizen explains, NERC's Control Performance
Standards (CPS1 and CPS2) require a Control Area operator to
readjust generator outputs to match changes in load. Another
NERC standard, Disturbance Control Standard (DCS) requires a
Control Area operator to readjust generator outputs after a
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disturbance on the system in order to reestablish system security
and prevent overloads from any subsequent disturbance. The
August 14, 2003 blackout resulted when these NERC standards were
violated and generators were not adjusted in a timely fashion to
prevent transmission overloads.
Inability to meet NERC standards is an increasingly serious
concern. Prompted in part by the August 14, 2003 blackout, and
in part by the failure of Congress to pass electric reliability
language, NERC, with support from FERC and DOE, has moved to
conduct readiness audits of all Control Area operators and
security coordinators at least once every three years, as well as
require Control Area operators, security coordinators and regions
to report all violations of NERC standards to NERC. In the past,
the identity of those violating NERC standards has been
confidential and not disclosed. Until present, not even the NERC
Board has known the identity of violators; these were deemed
confidential by the utilities. However, at the June 15, 2003
meeting of the NERC Board of Trustees, NERC determined that in
the future it will disclose publicly all reported violations and
audit results. In my mind this is a far more serious penalty
than the monetary penalties that are envisioned in pending
federal legislation.
A volatile load profile could also impact a generator's
profitability in MISO's future real time energy market. I
discuss this future market later in my testimony. This market
will set Locational Marginal Prices ("LMPs") every 5 minutes and
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the volatility of NIPSCO's load will be reflected in volatility
of the LMPs. The LMPs are the prices the market pays to
generators in the real time energy market. A generator earns
money when the LMP at its bus location is higher than its
marginal cost to generate, and loses money when the LMP at its
location is lower than its marginal cost to generate. A
generator therefore needs to be able to produce at maximum output
when it is profitable to do so, and minimum or zero output when
the LMP falls below its marginal cost to generate. Experience of
generators in the PJM real time energy market have demonstrated
that a plant such as Mitchell is poorly-suited to be profitable
in a volatile LMP market.
As Mr. Venhuizen has also explained, MISO also plans to
establish a regulation market for which Mitchell is ill-suited.
Q: IS IT POSSIBLE THAT THIS SITUATION WILL IMPROVE OVER TIME?
A: Yes. With sufficient interconnection capacity, NIPSCO's load
could be supplied by other generators in the regulation market.
But the timing for establishing a regulation market in MISO is
uncertain. MISO and PJM have announced plans to develop a joint
and common market that eventually will produce very large
regional energy and regulation markets and a security constrained
dispatch equivalent to that of a much larger control area. As
discussed later, the timing of this initiative has slipped and is
uncertain. However, these same market forces that potentially
will improve NIPSCO's ability to meet these volatile demand
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characteristics through additional intertie capacity could
negatively affect the value of the Mitchell plant as discussed in
Mr. Venhuizen's testimony.
Q: IS THERE A NEED FOR ADDITIONAL BASE LOAD CAPACITY IN THE REGION?
A: No. There is a surplus of low cost base load generation.
Startup of Mitchell would exacerbate the surplus and the
inefficiency of the oversupply condition by increasing overall
fixed costs for supplying load while not decreasing the variable
costs.
III. ENVIRONMENTAL ISSUES
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Q: PLEASE DESCRIBE THE ENVIRONMENTAL ISSUES ATTENDING A STARTUP OF
MITCHELL.
A: Mitchell is a 1950s era coal fired plant. Environmental concerns
have grown greatly since that era. Today's air and water
regulations are far more stringent than those the plant was
designed to meet, and tighter environmental regulations are on
the horizon. Although upgrades have been made over the time the
plant was in operation, a startup initiative would invite new
scrutiny of the plant's environmental profile. As Mr. Arthur E.
Smith, Jr. explains, the extent of upgrades that might be
required by environmental regulators will be affected by the
structure of future emission standards and whether an allowance
trading program is included in the regulations. If applications
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and fees for a startup were put forward, the determination of
required upgrades would probably not be forthcoming for at least
a year. In my experience, the engineering and cost estimates to
perform the upgrades would require another year. My experience
has also shown that actual final costs can escalate by as much as
100% over early cost estimates due to the unpleasant surprises
that opening up a 50 year old boiler entails, as well as due to
regulatory creep and scope increases. The financial risks
imposed by the environmental risk issues are very large.
Several of the upgrades currently available and well known
to environmental regulators entail injection of chemicals or
other processes that raise the cost of generation, so that what
once seemed low fuel cost incremental power is no longer as low
cost after the costs of required upgrades chemicals injected are
factored in.
However there are even larger environmental risks in the
future. As Mr. Mr. Smith explains, at present, in both the EPA
and Congress, decisions are pending that will affect the costs
and viability of coal fired plants everywhere. These include
decisions on three vs. four pollutant standards, mercury in coal,
particulates, fly ash disposal, fresh waters, etc. These could
render a startup decision based on today's standards
inappropriate.
Initiatives are underway at both the federal and state
levels to promote integrated coal gasification combined cycle as
a clean coal alternative that would also better fit unique load
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profiles such as NIPSCO's. These initiatives could hasten
retirement of existing base load coal plants.
I believe that the risks created by the environmental
upgrade cost overhangs I have described are very large, and it
would require very large proven long term benefits to justify the
taking of such risks.
IV. MISO RTO AND MARKETS
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Q: DOES THE TIMING OF MISO'S MARKET IMPLEMENTATION AFFECT STARTUP OF
MITCHELL?
A: Yes, but the impact is unclear. I expect that MISO's wholesale
energy marketplace will evolve much as PJM, becoming more
sophisticated and complete over a period of years. When MISO's
wholesale electricity marketplace is fully developed, there will
be a common economic least-cost security constrained dispatch
involving many more generators over a much larger region. The
dispatch patterns are certain to differ from current patterns,
and some generators will benefit at others' expense. Generators
will be paid at the locational marginal prices at their bus.
These prices will be high where there is a shortage of supply and
low where there is an excess of supply, so that generators in an
area of oversupply will have a more difficult time covering fixed
costs and variable costs and achieving a profit. For load
serving entities that want to self-schedule or contract bi-
laterally with specific generators, hedging instruments will
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provide a mechanism to protect the contract parties from varying
locational prices and provide delivered price certainty. These
hedging instruments will be tradable or saleable but only some
will be desirable and so valued; others may be undesirable to own
and have little or negative value. A market for regulation
service will exist so that those whose generation cannot follow
load variations can procure that service from those who can in
the wider market. Obviously, the financial outlook for a
generator can be very different in this post-market world than it
was in the pre-market world.
Q: YOU HAVE SAID THAT STARTUP OF MITCHELL IS UNWISE DUE TO INABILITY
TO FOLLOW NIPSCO'S UNIQUE LOAD PROFILE AND THE UNCERTAINTY OF
ENVIRONMENTAL COST OVERHANG; WILL THIS CHANGE IN THE MISO POST-
MARKET ENVIRONMENT?
A: It would almost certainly be different due to the larger market,
more generators in the dispatch, locational pricing, hedging
instruments and a market for regulation services. Older less
efficient units such as Mitchell are likely to have a difficult
time competing in a fully developed marketplace. However,
whether the post-market environment would be beneficial or
harmful to Mitchell's financial viability is unknown to me at
this time. While modeling studies might be able to forecast an
outcome, such studies are time-consuming and expensive to perform
and have proven to be prone to inaccurate projections. This is
due to the numerous assumptions they require and the low
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probability that all the assumed inputs will occur as forecast,
especially when moving from the more controlled economic state
currently to a more complex and dynamic market state in the
future. The economy can change; load forecasts change; new
generators come on line; old generators retire; market policies
and protocols change due to stakeholder input; fuel prices
change; new transmission may be built; etc. The very timing of
the MISO market implementation is uncertain; there is no reason
to assume that the slippages which have occurred to date in MISO
markets, are not to be followed by more slippages.
V. REGULATORY UNCERTAINTY IN THE ELECTRIC UTILITY INDUSTRY
Q: WHAT IS THE STATE OF THE ELECTRIC INDUSTRY AND THE REGULATORY
UNCERTAINTIES THAT INFLUENCE INVESTMENT DECISIONS SUCH AS THE
STARTUP OF THE MITCHELL COAL PLANT?
A: For almost past two decades the electric industry enjoyed a lack
of the energy price volatility that followed the Arab oil embargo
of the 1970s. However, more recently there have been structural
changes resulting from deregulation initiatives. The National
Energy Policy Act of 1992 greatly increased prospective
competition for the production and sale of power at the wholesale
level. FERC Orders 888 and 2000 mandated open access to the
transmission systems of jurisdictional electric utilities. In
1996, following issuance of FERC Order 888, Merrill Lynch stated
that "the industry is in a monumental transition state The risk
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profile of the electric utility industry is clearly reaching
higher levels than in the past and will further increase."<F1>
Since FERC issued its Open Access NOPR in 1995 (and
subsequent Orders 888 and 2000), ISOs and RTOs have been emerging
across much of the United States. Understandably, due to the
pre-existence of tight power pools, ISO/RTOs emerged in the
Northeast earlier than in many other parts of the nation.
Q: WHY HAVE ISO/RTOS DEVELOPED ALONG SUCH DIFFERENT TIME LINES?
A: This is because of regional histories and cultural differences,
political forces and industry crisis:
(a) The transmission owners in the Northeast enjoyed a
longstanding cultural realization that sharing of transmission
and generation resources brings about both economic and
reliability benefits and thereby lower operational and financial
risk. PJM Power Pool was formed in 1927 by three utilities, grew
to ten utilities by the 1970s and is still growing to the west
and south. NEPOOL was formed in 1971 and has a 33 year history
of success. NY Power Pool was also formed in the early 1970s.
(b) The tight power pools, having existed in the Northeast
for many years, already had many of the features, infrastructure,
staffing, policies and practices that an ISO requires, so the
transition from tight power pool to ISO was a small, easy and
relatively inexpensive, low-risk step. In parts of the United
___________________
<FN>
<F1> Merrill Lynch, ELECTRIC UTILITY INDUSTRY REPORT, p. 3 (June 24,
1966).
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States where ISOs/RTOs are less mature than in the Northeast,
such as MISO, the timing of achieving the establishment of
competitive markets is uncertain. This is because the
difficulties and costs of creating the infrastructure, staff,
markets, and protocols with no pre-existing infrastructure are
significantly greater than in the Northeast where a foundation
already existed with the tight power pools.
(c) In places where there is not a cultural heritage of
tightly pooled operation, as there was in PJM, important issues
regarding ISO/RTO design and structure tend to be resolved
through compromise and politics rather than based on the physics
of the grid.
(d) There is greater risk of getting something wrong when
trying to build an ISO/RTO from scratch rather than in converting
from an existing tight power pool.
(e) The California energy crisis and Enron disaster in 2000
caused many to pause and reevaluate.<F2>
(f) Inexperienced system operators in a nascent ISO/RTO are
more prone to operational errors than those where there is an
experienced staff available from a tight power pool. This was a
contributing factor to the August 14, 2003 blackout which
originated in MISO, a nascent RTO.
____________________
<FN>
<F2> Platts ELECTRIC UTILITY WEEK (July 9, 2001) noted that the "crisis
saps investor confidence" and that fallout from the financial deteriora-
tion of California's utilities had spread beyond the state as "investors
have turned away, spooked by the political and regulatory climate."
17
Q: DESCRIBE THE VARIOUS REGULATORY UNCERTAINTIES THAT EXIST GOING
FORWARD.
A: I will briefly summarize several of them.
FERC: FERC followed Orders 888 and 2000 with its Standard
Market Design ("SMD") that went farther than the two orders in
detailing new markets. The criticism of the SMD was intense and
caused Congress to modify the electricity bill provisions to
prevent FERC from proceeding. FERC retreated by issuing a
whitepaper that softened many of the SMD provisions; however,
there has been no subsequent rulemaking. FERC in its whitepaper
championed Regional State Committees that would have input on
several regional matters, but it is too early for me to draw
conclusions about the impact these committees will have in the
future. FERC is also unclear about its market power screen.
NERC: NERC has been seeking congressional legislation to
give it the authority to enforce compliance with mandatory
reliability standards. The legislative language NERC has pushed
for over four years is tied up in a comprehensive energy bill
that has included issues far removed from electricity, such as
Alaskan drilling, ethanol and liability for gasoline additives.
Congress so far has been unwilling to remove the NERC provisions
and move them as stand alone legislation. Meanwhile the blackout
of August 14, 2003 called a time out on regulatory policy
initiatives as fact finding and analysis occurred.
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CONGRESS: As described above, Congress continues to be
stalled on passing its energy bill, and unless another blackout
pushes it into action, expectations for passage are gloomy for
the near term.
DOE: Having just established and staffed an electric
transmission and distribution office in the past year, DOE is
busy trying to define its role in the electric industry. So far
it has spoken enthusiastically regarding new technologies and a
HVDC super-grid, neither of which assist in making investment
decisions in the short term.
Q: WHAT IMPACTS OCCURRED TO GENERATORS WITHIN PJM AS A RESULT OF
RESTRUCTURING AND THE ESTABLISHMENT OF MARKETS?
A: After PJM's wholesale electric markets were in place, generators
reacted in several ways:
(a) Generators invested to lower startup cost, lower
minimum load operating capability, improve ramp rates, and reduce
forced and scheduled maintenance outages; generators also
invested to improve their ability to sell into ancillary markets
such as the regulation, black start and capacity markets;
(b) generators were shut down or mothballed in areas of
oversupply;
(c) generators were built aggressively in areas of
undersupply to capture the higher locational marginal prices;
(d) FTRs, the congestion hedging instruments in PJM's LMP
marketplace, became an important component of increasingly
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sophisticated portfolio sales contracts between suppliers and
load serving entities.
These interdependencies and complexities, along with the fact
that generation tends to be capital intensive and subject to
multiple regulators, make generation the most difficult of the
industry components - generation, transmission, and distribution
- to manage well.
VI. CONCLUSION
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Q: WHAT IS YOUR OVERALL CONCLUSION REGARDING STARTUP OF MITCHELL?
A: Startup would likely increase NIPSCO's capital costs, its
generation fixed and variable costs, and its exposure to very
large and uncertain environmental expenditures. Startup would
not resolve the problems associated with NIPSCO's unique and
unfavorable load profile. The timing and end-state of MISO's
market initiative is unknown as is its effect on Mitchell's
financial viability. Startup would fly in the face of regulatory
uncertainties at the federal level that neither NIPSCO nor the
State of Indiana are in a position to resolve. I conclude that
for the reasons put forth in the foregoing testimony the startup
of Mitchell would be a very costly and risky investment that does
not entail commensurate benefits.
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Q: DOES THAT CONCLUDE YOUR PREPARED DIRECT TESTIMONY?
A: Yes, it does.
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